Source: Golden Ten Data
Strategists believe that unless Powell unexpectedly “releases pigeons” at a press conference, it will be difficult for US stocks to continue to rise.
US stocks are facing a familiar problem. Although corporate profits in the first quarter were better than expected, it has been difficult for the market to continue to rise, as rising US bond yields suppressed the popularity of the stock market, reminding investors of the 2023 period when the stock market plummeted due to rising US bond yields.
Michael Kantrowitz, chief investment strategist at Piper Sandler, wrote in his weekly report to clients on Friday:
“Higher US bond yields are now a systemic problem facing US stocks.”
Kantrowitz mentioned the market trend over the past month, which can be simplified to a basic formula: when US bond yields rise, US stocks fall. Recently, US bond yields have soared. Since the beginning of April, the 10-year US Treasury yield has risen more than 40 basis points to 4.63%, the highest level since November 2023. The S&P 500 index (SPX) fell about 3% during this period.
In the research report video sent to clients, Kantrowitz said, “Looking at it now, it is really difficult for US stocks to rise without falling interest rates.”
The two-year US Treasury yield also showed the same trend. Evercore ISI's Julian Emanuel marked 5% as a key technical level that dragged down US stocks during last year's US bond sell-off. Notably, US stocks recently retreated from April highs, just as two-year US Treasury yields hit 5%.
At a time when US bond yields are rising, investors have drastically reduced their bets on the Federal Reserve cutting interest rates this year. According to foreign media data, the market's expectation that the Fed will cut interest rates has changed from cutting interest rates seven times during the year to probably only about once.
Mike Wilson, chief investment officer at Morgan Stanley, wrote in a research report on Sunday that unless Federal Reserve Chairman Powell “unexpectedly shows a dovish stance” at a press conference on Thursday, upward pressure on US bond yields is likely to continue.
However, given the recent boom in inflation data, economists do not expect Powell to continue to adhere to the dovish stance during his speech.
Bank of America economist Michael Gapen wrote in a research report, “The main message we expect from the press conference is that austerity will take more time to take effect. Powell should indicate that the next step is still likely to be to cut interest rates, but the Federal Reserve will adopt a wait-and-see model until it gains the necessary confidence on the inflation issue.”
This means Powell will repeat his previous statement, which did not bring much relief to the bond market.
The rise in US Treasury yields also helps explain why the S&P 500 index fell nearly 3% this month, although the first-quarter earnings season so far has been better than expected. The earnings of S&P 500 companies in the current quarter were 9% higher than the expected average, the highest level since 2021, but the stock price reaction was “lackluster.”
“We believe this is due to rising interest rates putting pressure on valuations,” Wilson wrote. Strategists don't think this trend will change anytime soon. David Kostin, chief US equity strategist at Goldman Sachs, said:
“Although 'higher and longer' interest rates are not necessarily an insurmountable obstacle to the stock market, if interest rates continue to rise, some parts of the stock market may lag further behind the market. Most notably, stocks with weak balance sheets generally underperformed.”
Editor/jayden