Stock Market Rally Is Set to Weather Higher Bond Yields, Investors Say

With the soft-landing narrative for the world’s biggest economy gaining traction, the majority of 331 respondents expect losses for S&P 500 Index to be contained to less than 10% should yields on the 10-year Treasury resume their climb and hit 4.5%. That would allow the US equities benchmark to hold on to some of its 18% year-to-date gains.

With the Federal Reserve prepared to keep borrowing costs elevated until inflation is on a convincing path toward the US central bank’s 2% target, there’s more room for yields to rise even further. Federal Reserve Bank of Cleveland President Loretta Mester said on Friday inflation remains too high despite recent improvements.

Survey respondents also predict the yield on the 10-year Treasury inflation-protected securities will be lower five years from now, indicating that real interest rates, defined as nominal rates minus inflation, will come down. The sticking power of the US stock rally in 2023 has taken several market participants by surprise, but bulls point to solid economic growth in the face of high interest rates as a sign of confidence. Outperforming tech names, bolstered by the frenzy for anything artificial intelligence-related, have helped sustain those gains.

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