(Bloomberg) — This year’s U.S. stock market rally is strong enough to withstand another leg for bond yields, according to the latest Markets Live Pulse survey.
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As the soft landing narrative continues to gain momentum for the world’s largest economy, a majority of 331 respondents expect the S&P 500 Index to hold a loss of less than 10%, while the yield on the 10-year Treasury should continue, reaching 4.5%. That would allow the U.S. stock benchmark to retain some of its 18 percent year-to-date gain.
“If we get higher interest rates and higher bond yields, it’s probably because the macro economy will be surprised to the upside,” said Christopher Hearns, portfolio manager at Edentree Investment Management Ltd. Bad place compared to Bond.
In August, the 10-year note hit a 16-year high of 4.36%, a sign that a continued intractable U.S. economy will push investors selling interest rates higher. The jump in yields made August the worst month for the S&P 500 since February, although the stock benchmark remained well above its previous levels when yields rose at current levels.
With the Federal Reserve poised to raise borrowing costs until inflation is on a plausible path toward the U.S. central bank’s 2% target, there is plenty of room to raise yields further. Cleveland Federal Reserve Bank President Loretta Meister said on Friday that despite recent improvements, inflation remains too high.
However, strategists expect a higher rally closer to 4.5%. At the age of 10, such a product is HSBC Holdings Pvt
Some strategists see the product falling. Wouter Sturkenbom, chief investment strategist for EMEA and Asia Pacific at Northern Trust Asset Management, expects the yield on the 10-year note to trade around 4% by the end of the year.
And it could be very difficult to get additional stock gains, notes MLIV’s Ven Ram. In a world where two-year US yields can be locked in at a whisker short of 5%, you have to be overly optimistic about earnings growth to give up the certainty of cash flows provided by Treasuries. It is also difficult to share the market’s optimism about the possibility of a soft landing.
Pollsters predict the yield on the 10-year Treasury inflation-protected bond will be lower five years from now, suggesting that real interest rates, translated as nominal rates, will fall as inflation declines.
Meanwhile, the correlation between stocks and bonds has been positive since early 2022 as markets support the Fed’s tightening campaign to curb rising inflation. More than 50% of survey respondents expect this relationship to turn negative later this year, reverting to the long-term trend of this century.
At the same time, the poll found that 59% of investors still see a portfolio of 60% stocks and 40% bonds as a viable investment strategy. These portfolios took a hit last year as both asset classes fell in tandem, the strategy’s worst performance since 2008. This year it increased by 12%.
In the year The sticking power in the 2023 US stock rally has surprised many market participants, but bulls point to strong economic growth as a sign of confidence in the face of higher interest rates. Advanced tech names helped maintain those gains, fueled by a frenzy for anything related to artificial intelligence.
That said, most MLIV survey respondents see real estate and technology as more vulnerable than the 4.5% Treasury yield, with more than half saying banks will be the biggest winners. A decline in tech stocks will be beneficial as the Nasdaq 100 index is up 42% in 2023.
“We should be concerned about the loss-making parts of the tech sector, but I expect the large, high-earning tech companies that contribute to the indices should be somewhat protected from high yields,” said Rajeev de Mello, global macro portfolio manager at Gamma Asset Management SA.
Growing concern about stocks with higher valuations, such as those in the technology sector, is also reflected in more than 50% of MLIV survey participants expecting value stocks to meet or outperform their growth peers by the end of the year. So far, the S&P 500 growth index — which includes Apple Inc. and Nvidia Corp. — has outperformed the S&P 500 value index since 2020. Peers.
“We believe yields are high, earnings per share are being bought by managers who have underperformed and have to play through the end of the year, and earnings estimates will continue to be modestly revised,” said chairman Thomas Hayes. Great Hill Capital. “Golden Area”
The MLIV Pulse survey of Bloomberg News readers, both terminal and online, is conducted weekly by Bloomberg’s Markets Live team, which also runs the MLIV blog. This week, the survey focuses on American consumers. Are you strapped for cash or going broke? Share your views here.
–With help from Sagarika Jaisinghani.
(Includes regional description in paragraph 15)
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