With yields having rallied, what about equities?
Nasdaq, S&P 500 green, Dow dips
Tech leads S&P sector gainers; Energy weakest group
Dollar edges up; crude ~flat; gold up; bitcoin up >2%
U.S. 10-Year Treasury yield dips to ~4.38%
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WITH YIELDS HAVING RALLIED, WHAT ABOUT EQUITIES?
With bond yields rising sharply in recent weeks, Solita Marcelli, chief investment officer for Americas at UBS Global Wealth Management, has been examining the implications for stocks.
While rising yields are typically a headwind, the CIO wrote on Tuesday that she sees "several reasons why equities can withstand the most recent move."
Marcelli writes that when rallies in yields are "largely the result of worries over elevated inflation" equities can suffer.
As an example, she pointed to 2022 concerns that inflation was stubbornly high, leading the Federal Reserve to raise rates aggressively. This, of course, resulted in "worries over slowing economic growth, which would drag on corporate profits."
But, this time is different, according to the CIO.
While markets are indeed anticipating slightly higher inflation due to Donald Trump's election, she says that recently "much of the rise in yields has been driven by hopes of stronger economic growth" as the resilience of US data took investors by surprise in October.
Marcelli noted the difficulty of pinning down "what point rising yields becomes disruptive" especially as it can vary.
However, she estimates that monthly moves in the real 10-year yield above 40 basis points, using Treasury Inflation-Protected Securities, have the potential to increase equity volatility. And by this measure, recent moves fell slightly short, with a rise of 36 basis points in October and momentum slowing in November.
And Marcelli also said that her base case is for a decline as the increase in US Treasury yields "has gone too far."
Separately, while tech and growth stocks tend to react negatively to rising yields as most of their value relates to future profits, Marcelli notes that "enthusiasm for AI has made higher yields easier for the market to digest."
"While enthusiasm for AI is no longer new, it has contributed to the resilience of markets overall," she wrote.
With this, Marcelli kept her expectation that the S&P 500 .SPX would reach 6,600 by the end of 2025. This would represent roughly a 12% gain from Monday's closing level.
(Sinéad Carew)
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