S&P 500’s Winning Streak Amid Challenges
On Friday, the S&P 500 index marked its eighth consecutive week of gains—the longest winning streak since 2023. It appears that robust corporate earnings, coupled with excitement about artificial intelligence, have helped, even as investors seem to overlook risks, particularly regarding tensions with Iran.
However, the bond market is feeling some unease. U.S. Treasury yields are hovering at their highest levels in a year, which could dampen stock market growth. Remember, when bond prices fall, yields tend to rise.
Traders are now anticipating the U.S. Federal Reserve to keep interest rates steady for the immediate future, although there could be hikes later in the year. This is taking place as the Strait of Hormuz remains closed, driving oil prices to a four-year high and raising fears of inflation.
Increased Treasury yields mean that loan and mortgage rates are also on the rise, adding pressure on consumers at a time when confidence levels are, according to surveys, quite low.
Rob Williams, chief investment strategist at Sage Advisory, expressed concerns, noting that once U.S. Treasury yields surpass one-year highs, “it becomes harder for the stock market to ignore.” He underlined that this affects everything, including housing affordability.
On a positive note, U.S. corporations continue to report strong profits, with the S&P 500 on track for impressive quarterly growth, the best since 2021, according to FactSet.
This year alone, the S&P 500 has reached new all-time highs 18 times and is just shy of another milestone.
Factors such as advancements in AI and tax cuts under former President Trump are contributing to the boost in stock prices, especially in tech and AI sectors.
It’s essential to note that the S&P 500’s performance is influenced by its largest companies—meaning that the index is essentially weighted by market value. While the index itself is up about 8.6% since the onset of the Iran conflict, an equal-weighted version has only gone up by less than 1% during the same timeframe.
“What’s working is just becoming more limited,” remarked Jeff Klingelhofer, a portfolio manager. He suggested that, at least for now, investors are too focused on certain areas, overlooking potential warning signs.
Since March 30, the 10-year bond yield has risen from 4.34% to roughly 4.56%.
Klingelhofer noted he sees some favorable conditions for stocks, especially in AI, yet he’s surprised by the market’s dismissal of the challenges that rising yields could pose for consumers, specifically evident in auto loan delinquencies.
“I don’t think the market is properly focused on all the potential headwinds,” he said, highlighting a disconnect in investor sentiment.
Bond investors are chasing higher yields to mitigate inflation risks tied to ongoing conflicts and increasing government debt in several countries.
Interestingly, the current market sentiment leans heavily on greed. According to CNN’s Fear and Greed Index, the S&P 500 has indicated “greed” since mid-April, following its first all-time high amidst the turmoil.
Treasury yields usually fluctuate based on expectations surrounding inflation and economic growth. While some investors are indeed worried about inflation, others lean on the positive aspects of economic growth, which are concurrently pushing yields and stock prices higher.
As for the U.S. GDP, it’s sitting at a healthy 4.3%, based on daily tracking from the Atlanta Federal Reserve. The unemployment rate was also relatively low in April, maintaining at 4.3%.
“While fast changes in interest rates could challenge consumer resilience, the current margins aren’t significant enough to impact the average American right away,” noted Kriti Gupta, a global investment strategist at JPMorgan Private Bank.
Should investors remain focused on the strong economy, the stock market might overlook the implications of rising yields. Still, everything becomes trickier with persistent inflation which, despite a solid economy, is weighing down consumers.
This all circles back to oil prices and their trajectory, particularly considering that they’ve climbed over 68% since the year’s beginning. If they stay around $100 per barrel, inflation worries may linger and could push yields up even further.
The core consumer price index, which excludes volatile food and energy prices, saw a rise of 2.8% in April compared to the same time last year. According to strategists at Barclays, if this metric exceeds 3% year-over-year in the coming months, rising yields could start impacting stock prices negatively.
JPMorgan’s Gupta posited that the stock market could absorb higher yields if economic growth continues robustly. Yet, intensifying inflation worries and heightened volatility in the bond market could overshadow this positive outlook.
Finally, Gupta observed that the U.S. market is navigating uncertainties tied to the evolving situation in Iran.
