NextFin News - The relentless climb of U.S. Treasury yields, which typically acts as a gravity-like force on equity valuations, may no longer be the existential threat to the stock market rally that many investors fear. Max Kettner, Chief Multi-Asset Strategist at HSBC, argues that the current equity bull market possesses enough fundamental momentum to withstand the pressure of rising borrowing costs, provided the move in yields remains orderly.
The 10-year U.S. Treasury yield stood at 4.426% on Wednesday, according to data from the Wall Street Journal, hovering near its highest levels of the year. Historically, such a threshold has triggered "valuation indigestion" for the S&P 500, yet Kettner suggests that the robust health of corporate earnings and a resilient U.S. economy are providing a sufficient cushion. Kettner, known for maintaining a consistently constructive stance on risk assets throughout the post-pandemic recovery, believes the market has shifted its focus from the "cost of capital" to the "return on capital."
This perspective, while gaining some traction among momentum-driven funds, does not yet represent a broad Wall Street consensus. Many sell-side analysts remain wary that if the 10-year yield breaches the 4.5% or 4.7% mark rapidly, it could trigger a systematic de-risking event. Kettner’s judgment is rooted in the observation that equity risk premiums have compressed without breaking the market's upward trajectory, suggesting investors are willing to pay a premium for growth even in a high-rate environment.
The primary risk to this "yield-immune" thesis lies in the speed of the bond market's adjustment. A gradual drift higher in yields reflects economic strength—a "good" rise in rates—whereas a sudden spike driven by inflation surprises or fiscal concerns could still derail the rally. HSBC’s analysis assumes that U.S. President Trump’s administration will maintain a policy mix that supports domestic growth, though critics argue that potential tariff escalations or widening deficits could eventually force yields to a level that even the strongest earnings cannot offset.
Skeptics point to the narrowing gap between the S&P 500 earnings yield and the risk-free rate as a sign of exhaustion. If the Federal Reserve is forced to keep rates "higher for longer" due to sticky service-sector inflation, the historical correlation between yields and stocks may reassert itself with a vengeance. For now, Kettner remains overweight on equities, betting that the earnings engine of Big Tech and a broader industrial recovery will outrun the headwinds from the fixed-income market.
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