For years, investors could easily justify a preference for stocks because other assets offered paltry returns as the Federal Reserve kept rates at historic lows, giving rise to the acronym “TINA,” or “there is no alternative.”
“As interest rates continue to rise, there is a greater number of choices to capture total return or income without taking on stock market volatility,” said Michael Arone, chief investment strategist at State Street Global Advisors. “That will continue to put some downward pressure on stocks.” “The concept that there is no alternative to stocks is not true anymore,” said Walter Todd, chief investment officer at Greenwood Capital.
As bond yields have climbed, stock valuations have weakened. The S&P 500 trades at a forward price-to-earnings ratio of about 16 times, compared to nearly 22 times at the start of the year, according to Refinitiv Datastream. Many investors believe bond prices are unlikely to stabilize until there is evidence of ebbing inflation and a pivot in the Fed’s tightening policy.Still, the robust yields are likely to continue presenting a challenge to stocks, investors said.
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