Key facts
- US stocks have largely ignored a surge in Treasury and global bond yields.
- The S&P 500 is trading near its August 13 record high.
- Strong earnings growth, particularly from tech giants driven by AI, is supporting stock valuations.
- The US economy shows resilience with accelerating job growth and robust consumer spending.
- Smaller US companies, measured by the Russell 2000 index, have outperformed the S&P 500 this year.
- A positive correlation between stocks and bonds has diminished bonds' traditional safe-haven appeal.
U.S. stocks have largely withstood a significant increase in Treasury and international government bond yields, with the S&P 500 remaining close to its record high. This resilience is attributed to the ongoing AI boom fueling profit growth expectations for tech giants like Apple and Microsoft, as well as a generally robust U.S. economy.
While high-growth stocks are typically vulnerable to rising yields due to the discounting of future profits, the current market environment sees investors continuing to favor equities. Chip stocks have experienced some pullback, but some strategists believe this is a natural correction after earlier gains, with expectations of a tighter supply-demand dynamic for memory chips next year.
Corporate earnings have provided a strong foundation, with second-quarter S&P 500 profits expected to have grown 53% year-on-year, and further substantial growth anticipated in the coming years. Cloud computing businesses of companies like Alphabet and Amazon have also shown strong performance, boosted by AI demand.
The U.S. economy has demonstrated resilience, with accelerating job growth in August and consumer spending revised upward. Analysts at Aberdeen noted that consumers, labor markets, and corporate balance sheets have held up better than feared, defying recession expectations.
Smaller U.S. companies, represented by the Russell 2000 index, have also outperformed the S&P 500 this year, driven by strong earnings and a search for market exposure beyond large-cap tech. Despite recent pressure from higher yields, many anticipate continued momentum for small caps, particularly if the Federal Reserve holds interest rates steady.
The traditional inverse relationship between stocks and bonds has been challenged. The conflict in Iran has contributed to rising oil prices and interest rate hike expectations, leading to a bond market rout. Analysts observe a positive correlation between stocks and bonds post-pandemic, suggesting that bonds may offer less diversification and hedging benefits compared to equities, leading some investors to shift allocations towards stocks.