Global bond yields are hovering near multi-decade highs, and the resilience of the U.S. stock market is being put to the test.
Goldman Sachs' Chief Global Equity Strategist Peter Oppenheimer warned that if bond market selling continues to intensify, especially if yields rise at a faster pace, the U.S. stock market could quickly become vulnerable. He stated that what really needs attention is whether the bond market will experience even more significant and severe selling from its current level. He said, "In that case, I think the stock market will become fragile."
He pointed out that this year, corporate profitability has been relatively healthy, which to some extent has absorbed the valuation pressures on U.S. stocks, providing a certain buffer for the stock market to withstand the rise in bond yields.
At present, the stock market has not yet been significantly impacted by the continuous selling in the bond market. However, as the global average bond yield remains near several decades-high levels at the end of this turbulent September, the tug-of-war between rising bond yields and corporate earnings growth has become a focal point of market attention.
Profits still provide support, but the buffer is not unlimited.
Oppenheimer believes that the fundamental fundamentals of the current U.S. stock market remain relatively positive. After several years of profit growth, companies continue to benefit from nominal economic expansion, with inflation and real output growth jointly driving up corporate revenues, providing some support for the stock market.
However, this support is not without limits. He emphasized that if bond yields continue to rise, especially at a rapid pace, the stock market will still face significant pressure. "We have found in the past that what matters is not only the absolute level of yields, but also the speed of adjustment and the reasons behind these changes in yields," he said.
This means that high yields alone do not necessarily trigger a correction in the stock market. What is more concerning is a rapid increase in yields over a short period. As long as profit growth can still absorb some of the valuation pressure, the stock market may maintain its resilience; however, if risk-free interest rates rise rapidly, the pace at which valuations come under pressure will also accelerate.
Market divergence focuses on how much faster yields can still rise
Behind this round of bond selling, there is an increase in market concerns that rising energy prices could drive up inflation and in turn affect the Federal Reserve's interest rate path. On Wednesday, U.S. Treasury yields temporarily slowed down their previous upward trend, as previously released U.S. economic data indicated some signs of cooling. However, global bond yields are still near multi-decade highs overall.
There are also disagreements among Wall Street institutions regarding the further impact of rising yields on the stock market. Morgan Stanley's Marina Zavolock believes that even if there is a new round of selling in the U.S. debt market, the stock market may still maintain a certain level of resilience.
The team led by Barclays strategist Emmanuel Cau is more cautious. It is reported that the team believes that as rising interest rates diminish the attractiveness of "no other choice" (TINA) trades, the momentum for the stock market to rise is weakening.
The core contradiction currently faced by the market is not simply a clash between "high yields" and "high valuations," but rather whether corporate earnings growth can continue to offset the valuation pressures brought about by rising interest rates. If yields rise slowly, earnings may still provide a buffer for the stock market; however, if bond sales accelerate and interest rates climb rapidly, the pressure on the stock market could significantly increase.
