The stock market is grappling with what many experts now regard as a ‘systemic problem’ that echoes the challenges faced in 2023. Despite corporate earnings for the first quarter of the year surpassing expectations, stock market performance has been lackluster, hampered by the rising Treasury yields that are dampening equity sentiment—much like the scenario last year when higher yields triggered a significant downturn in stock prices.
Michael Kantrowitz, Chief Investment Strategist at Piper Sandler, emphasized this persistent issue in a weekly client note, stating, “Higher rates are now a systemic problem for equities.” He illustrated this point by noting the recent market trend observed over the past month: stocks tend to drop whenever Treasury yields rise. Notably, the 10-year Treasury yield has surged over 40 basis points since early April, reaching a high of 4.63%—the peak since November 2023. Concurrently, the S&P 500 has experienced a decline of about 3%.
Kantrowitz further explained in a video distributed to clients, “At this point, it’s really hard to see equities going up without rates going down.”
This trend was also reflected in the movement of the two-year Treasury yield, which has approached a critical threshold. Julian Emanuel from Evercore ISI highlighted 5% as a key technical level that previously exacerbated the bond-driven sell-off last year. This April, as the two-year yield neared this level, reaching 4.98%, stocks again retreated from their recent highs.
The rise in yields aligns with a broader shift in market expectations. Investors have significantly reduced their projections for Federal Reserve rate cuts, moving from anticipations of nearly seven cuts down to just one expected in 2024, according to Bloomberg data. Morgan Stanley’s Chief Investment Officer Mike Wilson noted in a Sunday research note that this upward pressure on yields is likely to persist unless Fed Chair Jerome Powell offers a dovish surprise in his upcoming press conference.
In anticipation of Powell’s address, economists are setting expectations. Michael Gapen, US economist at Bank of America, predicted in a note that Powell would likely reaffirm the necessity for patience in monetary policy, hinting at continued rate cuts but confirming a wait-and-see approach until inflation targets are met. This stance would echo Powell’s previous remarks, which have so far done little to ease the bond market.
Wall Street’s Resilience Amid Fiscal Pressures
Despite these challenges, the start of the week saw Wall Street climbing, spurred by optimism from the tech sector. The S&P 500 rose by 0.4%, and the Nasdaq Composite gained roughly 0.5% as Tesla shares surged amid positive news from China. The Dow Jones Industrial Average, with fewer tech components, matched the rise with an increase of about 0.4%.
This positive momentum can be traced back to last Friday’s significant gains, driven by strong earnings from tech giants like Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) and Microsoft (NASDAQ:MSFT).
The market is now looking towards earnings reports from Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) expected later in the week, which will further test the resilience of the tech-driven rally, particularly with AI costs and prospects under close examination.
Tesla’s (NASDAQ:TSLA) stock experienced a notable uplift, rising more than 11% following CEO Elon Musk’s unexpected visit to China, which culminated in a promising deal with Baidu (NASDAQ:BIDU) for deploying its Full Self-Driving software, potentially revitalizing its sales in this vast market. Baidu’s US-listed stock also saw a significant upturn, climbing almost 7%.
Fed Decisions and Economic Forecasts
As these corporate narratives unfold, the financial markets are also bracing for the Federal Reserve’s upcoming policy decision at the conclusion of its two-day meeting on Wednesday. Amid mixed signals on inflation and economic forecasts, the central bank is expected to maintain interest rates at their 23-year high, with traders and analysts keenly awaiting any indication of future rate cuts.
Moreover, Philips’ (NYSE:PHG) US-listed shares soared over 33% after the company announced a much lower-than-anticipated $1.1 billion settlement concerning a recall of its breathing devices, injecting further optimism into the market.
This week’s activities underscore a critical period for Wall Street, balancing corporate success against broader economic policies and their implications for the future market trajectory. As investors and strategists navigate these complexities, the coming days will likely provide crucial insights into the interplay between corporate earnings, technological advancements, and fiscal policy adjustments.
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