Yield Scare That Shocked Stocks in February Barely Registers Now
(Bloomberg) -- Stock bulls rattled by rising yields six weeks ago have come to embrace the economic signal the latest spike is sending.
While Wall Street has worried that Treasuries -- fresh off their worst quarter since 1980 -- could derail the stock market’s rally, there’s little that seems to be backing up those concerns. The S&P 500 opened at a record Monday following Friday’s blowout March jobs report, even as benchmark Treasury yields flirted with their pre-pandemic highs.
Although rising rates typically take the shine off of expensively valued stocks, such as tech and growth names, the fact that U.S. economic data is so strong has overpowered that argument. The JPMorgan Forecast Revision Index -- a gauge of how much economic forecasts change in a quarter -- posted its biggest upward move in history this past quarter as economists raced to upgrade their outlooks. That’s now allowing stocks and bond yields to rise in tandem, Baird investment strategy analyst Ross Mayfield said.
“The stock market doesn’t care too much about rising yields as long as they’re rising for the right reasons,” Mayfield said. “Yields are rising because the economic outlook has improved. That’s a positive for companies that make up the stock market.”
The lurch higher in Treasury yields initially benefited cyclical sectors such as energy and financials at the expense of tech, yet the rally has broadened out in recent weeks as the breakneck speed of the bond selloff slows. The tech-heavy Nasdaq 100 climbed 2% Monday, outpacing gains in the S&P 500 and the small-cap Russell 2000.
Stocks should be able to maintain their appeal relative to bonds as so-called real yields -- which strip out the effects of inflation -- are still deeply negative at minus 0.64%, Morgan Stanley Investment Management’s Jim Caron said.
“If real yields just go up a lot, and growth is unchanged, then that’s a big-time tightening,” said Caron, a portfolio manager at the firm. “If you’re going from a 4% expectation of growth for 2021 to 8% expectation of growth for 2021, and real yields go up a little bit, the market can absorb that move.”
Optimism among economists has also filtered through to expectations for corporate America. Analysts boosted their earnings estimates for S&P 500 companies by 6.7 percentage points in the first quarter, according to weekly data compiled by Bloomberg. That’s the biggest quarterly increase on record in data going back to 2004, and has sent the expected growth rate to 22.5%.
“Since last June, 10-year Treasury yields have increased by 100 basis points (from 0.7% to 1.7%), leading many investors to question the sustainability of these elevated stock multiples,” Credit Suisse strategist Jonathan Golub wrote in a note last week. “With multiples stable, the market’s entire advance can be explained by improving earnings.”
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