This week, US Treasury bonds were sold off, with yields rising across the board. However, the US stock market has shown resilience. Analysis suggests that the main driving factors behind stock market returns are still ample liquidity, loose policies, as well as strong economic and earnings growth. The rise in bond yields may not necessarily have a negative impact on the stock market rebound
After a week of inflation concerns, surging bond yields, and turmoil in the U.S. election, the biggest lesson for U.S. risk assets may be that none of this matters.
This week, U.S. bonds were sold off, with yields rising across the board. The yield on the 10-year U.S. Treasury bond rose by about 15 basis points to its highest level since July.
However, the U.S. stock market showed resilience, with the Nasdaq 100 index up 0.1% for the week, approaching its historical high set on July 10. On Friday, the "Tech Seven Sisters" collectively rose, most chip stocks rose, and AI concept stocks saw more gains than losses...
Analysis suggests that the main drivers of stock market returns are still ample liquidity, loose policies, as well as good economic and earnings growth. The rise in bond yields may not necessarily have a negative impact on the stock market rebound.
However, the sharp rise in U.S. bond yields has also raised concerns in the market, with sentiment becoming tense. Yesterday, the VIX fear index rose by 6.55%.
Almost every market is increasing hedging activities. According to a report from Bank of America, investors have been moving funds into money market funds at the fastest pace in four weeks. Recently, the issue of overvaluation in the U.S. stock market has sparked intense discussions. This week, the rise in U.S. bond yields has led analysts to worry that the valuation of the U.S. stock market may be further pushed up.
Strong economic data and U.S. election uncertainty push up U.S. bond yields
Denitsa Tsekova and Isabelle Lee believe that strong economic data remains the main reason for the rise in U.S. bond yields, and it is also the basis for the market's bullish sentiment towards other assets.
This week, U.S. macroeconomic data has been strong, with jobless claims, durable goods orders, and consumer confidence reports all pointing to a resilient economy. Citigroup's economic surprise index has improved for three consecutive months, reaching its highest level since April.
According to the Wall Street Journal, about two-thirds of companies reporting earnings have exceeded market expectations, and Wall Street analysts predict that S&P 500 companies will achieve earnings growth of 14% in 2025 and 12% in 2026.
In addition, the uncertainty of the U.S. election has cast some shadows over the prospects of risk assets. Some analysts believe this is another reason for the rise in U.S. bond yields, as Trump's promised tariffs and fiscal spending will push up U.S. inflation.
The rise in U.S. bond yields may not necessarily have a negative impact on the U.S. stock market
Currently, the rise in U.S. bond yields has made some analysts increasingly concerned about the issue of overvaluation in the U.S. stock market, believing that the market may be further pushed up. However, other analysts believe that the rise in U.S. bond yields may not necessarily have a negative impact on the U.S. stock market, as stock market returns mainly depend on market expectations of earnings.
Marija Veitmane, Senior Multi-Asset Strategist at State Street, stated:
"The main drivers of stock market returns are still ample liquidity, loose policies, as well as good economic and earnings growth. We believe that the rise in bond yields may not necessarily have a negative impact on the stock market rebound." Jake Schurmeier, the portfolio manager at Haber Capital Advisors, also stated:
"The simple answer is profitability - current and future quarters' expectations imply healthy growth. As long as this situation continues, it is too luxurious to focus on everything that could go wrong."
Every Market is Hedging
Although the US stock market continues to show resilience, it is clear that it is no longer as calm as it was in August and September - US Treasury bonds are becoming more volatile, and the ICE BofA MOVE volatility index has seen its largest monthly net increase since the early days of the pandemic.
Hedging activities in almost every market are significantly increasing. There is a significant gap between implied volatility and actual volatility in the US bond and stock markets, indicating that market sentiment is becoming tense and stock investors are starting to reduce their positions. According to a report by Bank of America, investors are moving funds into money market funds at the fastest pace in four weeks.