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Despite being flat since September, the S&P 500 index is still boasting impressive year-over-year gains.
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The benchmark stock market gauge is up more than 16 percent so far in 2023, but one expert sees the rally losing steam.
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According to Jurien Timmer, global head of macro at Fidelity Investments, the global bull market for equities is in the “twilight”.
In the year Despite the Federal Reserve’s most aggressive monetary policy campaign since the 1980s, a surge in artificial intelligence-related technology stocks has boosted the stock market.
But one expert believes the rally is about to peter out, as rising bond yields erode demand for equities.
Two-year Treasuries now pay a yield of nearly 5%, near their highest levels since 2006 — and higher yields on government bonds, considered the safest investments, have hurt the appeal of riskier alternatives like stocks. Bonds maturing in 10 and 30 years pay 4.26% and 4.36%, respectively.
“All of this points to the fact that the global equity bull market is on the brink,” wrote Jurien Timmer, director of global macro at Fidelity Investments. LinkedIn post Tuesday.
“It seems safe to assume that we will go from double digits to single digits in the coming years, with valuations bearing the brunt of the reset.”
Timmer cited high bond prices as a major threat to stock prices. Two-year Treasury yields have risen 480 basis points over the past two years as the Federal Reserve raised interest rates to fight inflation. Ten-year mortgage rates rose nearly 400 basis points over the same period.
“If long yields continue to grow, it will leave a mark on valuations in the discounted cash flow (DCF) model, regardless of earnings.
Timmer isn’t the only one taking a cautious stance on equity.
Strategists at JPMorgan said in a recent note that they expect “rich valuations and excessive optimism” in the market to “defend” stocks.
“U.S. earnings are on hold, and expectations for next year’s deal look very optimistic with an aging business cycle, more restrictive monetary policy, rising capital costs, more accommodative fiscal policy, eroding consumer savings and household liquidity, and heightened risk.” Recession,” he wrote.
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