I would argue that one of the more impressive things in broader markets over the past week has been just how well equities have handled the move higher in bond yields.
10-year Treasury yields has been flirting with the 5% mark since the Fed, a level that you would think could make stocks get rather uncomfortable. Yet, we are seeing the Nasdaq push to record highs as the latest wave of AI enthusiasm has given tech shares another shot in the arm.
Meta has been at the centre of all of that after the early success of its new AI assistant, Muse, sparked a sharp rally in its shares and spilled over into other AI-linked names. In turn, semiconductor stocks have also benefited as investors start looking at what another wave of consumer AI adoption might mean for revenue rather than simply focusing on AI spending. It is very much a welcome distraction after the increased scrutiny on mounting capital expenditure by big tech in the past month or so.
And the timing of it couldn’t be better for stocks. It gives the market something tangible to trade against the rates backdrop.
Besides that, oil prices falling back has offered equities another reprieve. Brent crude slipping back below $100 has helped ease some of the immediate concern that higher energy prices will feed into inflation and force central banks to stay even more hawkish.
And when you put those things together, it becomes easier to understand why stocks have held up.
That being said, I wouldn’t interpret that as the equities market suddenly becoming immune to higher yields.
There is still a significant difference between 10-year yields testing 5% and convincingly breaking above the key level. So if yields start pushing beyond that threshold, the conversation for broader markets then changes rather quickly. Or rather should I say, the conversation then circles back to the same argument as to why stocks have struggled earlier this month.
Higher yields raise the discount rate applied to future earnings, which becomes particularly important for richly valued technology and AI stocks where investors are paying today for significant growth tomorrow. Apart from that, they also make bonds increasingly attractive as an alternative to equities.
So while the latest resilience is encouraging, it is perhaps not quite as robust as the headlines and what the price levels might suggest.
For now, AI optimism and softer oil prices are helping stocks absorb the rates shock. But if the bond market delivers another leg higher in yields, though, we may finally get a better sense of where that resilience starts to crack.
This article was written by Justin Low at investinglive.com.