Stocks are facing a familiar problem as rising Treasury yields weigh on sentiment for equities, reminding investors of the turbulent period in 2023 when higher yields sent stocks crashing. Despite better-than-expected earnings for the first quarter, the market has struggled to climb higher consistently.
Piper Sandler chief investment strategist Michael Kantrowitz highlighted the correlation between rising Treasury yields and falling stock prices over the last month. The 10-year Treasury yield has surged more than 40 basis points to 4.63% since the start of April, leading to a 3% decline in the S&P 500.
Kantrowitz emphasized that “higher rates are now a systemic problem for equities,” and suggested that it’s difficult to envision stocks rising without a decrease in rates. Similarly, Evercore ISI’s Julian Emanuel pointed out that the recent decline in stocks coincided with the two-year Treasury yield hitting 5%.
Market expectations for Federal Reserve interest rate cuts have also shifted dramatically, with investors now anticipating only one cut in 2024 compared to nearly seven cuts previously. This change has contributed to the upward pressure on yields, which is likely to persist unless Fed Chair Jerome Powell surprises on the dovish side during his upcoming press conference.
Economists expect Powell to maintain a cautious stance on inflation and indicate that the Fed will wait before making any significant policy moves. This outlook has not provided much relief to the bond market, as rising yields continue to impact stock valuations and performance.
Despite a strong first quarter earnings season, where S&P 500 companies have exceeded estimates by an average of 9%, stock price reactions have been subdued due to the pressure on valuations from higher rates. Goldman Sachs chief US equity strategist David Kostin noted that certain parts of the equity market, particularly stocks with weak balance sheets, are likely to lag if rates continue to climb.
As investors brace for Powell’s press conference and monitor the impact of rising yields on stocks, the market remains in a state of uncertainty. The ongoing struggle between earnings optimism and yield-induced caution underscores the challenges facing investors in the current market environment.
