Stocks face common problems.
Despite better-than-expected first-quarter results, rising U.S. Treasury yields weighed on stock sentiment and the market has struggled to consistently rally higher, with higher yields weighing on investors. It reminded me of the time in 2023 when the market crashed.
“Rising interest rates are now a systemic problem for stocks,” Piper Sandler chief investment strategist Michael Kantrowitz said in his weekly note to clients on Friday.
Kantrowitz pointed to last month's market movements, which can be simplified to a basic formula: As Treasury yields rise, stock prices fall. And recently, yields have skyrocketed. The 10-year Treasury yield has risen more than 40 basis points since early April to 4.63%, its highest level since November 2023.Meanwhile, the S&P 500 fell. Approximately 3%.
“At this point, it's very difficult for stocks to go up without interest rates coming down,” Kantrowitz said in a research breakdown video distributed to clients.
The same movement could be seen in the two-year Treasury yield, with Evercore ISI's Julian Emanuel citing 5% as the key technical level. This weighed on stock prices during last year's bond-led sell-off. Notably, the recent decline in the stock price from its highs during April was due to a two-year share price increase of 5%. As of Monday, the two-year bond yield was 4.98%.
Yields rose as investors sharply scaled back bets this year that the U.S. Federal Reserve would cut interest rates. Market expectations have changed from nearly seven rate cuts to just one in 2024, according to Bloomberg data. And unless Fed Chairman Jerome Powell delivers a “dovish surprise” at Wednesday's press conference, this upward pressure on yields will continue, Morgan Stanley Chief Investment Officer Mike Wilson said in a research note on Sunday. He said it was highly likely.
Economists don't expect that to happen when Powell speaks, given the recent upward trend in inflation.
“The main message of the press conference is that policy needs more time to work,” Michael Geipen, U.S. economist at Bank of America, said in a research note previewing the event. I predict that.” “Chairman Powell should signal that his next action is still likely to be a rate cut, but the Fed will be in wait-and-see mode until it gets the confidence it wants on inflation.”
This would be a repeat of Powell's previous comments, which brought little reassurance to bond markets.
Rising yields also help explain why the S&P is down nearly 3% this month, despite better-than-expected first-quarter results. S&P 500 companies beat earnings estimates by an average of 9% this quarter, the best since 2021, Wilson said, but the stock price reaction has been “sluggish.”
“We believe this is due to pressure on valuations from rising interest rates,” Wilson wrote.
And strategists don't expect this trend to change in the near term.
David Kostin, chief U.S. equity strategist at Goldman Sachs, said: “While 'longer interest rates' are not necessarily an insurmountable obstacle for stock prices, if interest rates continue to rise, certain parts of the stock market may lag. will increase,” he said. “Most notably, stocks with weak balance sheets are generally struggling.”
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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