LONDON : This month's sudden spike in inflation-adjusted bond yields has jolted TINA, the thesis that"there is no alternative" to stocks, yet if history is any guide, equities should withstand this rise in real interest rates or even flourish.
Stocks tumbled after a spike in U.S. yields. The impact was especially severe on the tech-heavy Nasdaq 100 index where stocks trade on the premise of bumper future earnings growth, making them particularly vulnerable to higher interest rates. "Historically when real yields have normalised back towards zero from negative levels, equities have had positive returns," Bernstein strategists Sarah McCarthy and Mark Diver told clients.
For a related graphic on US inflation notes, click https://fingfx.thomsonreuters.com/gfx/mkt/akpezendwvr/USper cent20inflationper cent20notes.JPGBehind the tech selloff is a premise that higher interest rates will cut into lofty share valuations. As a general rule of thumb, a sustained 100 bps rise in the U.S. TIPS yield causes a 20per cent drop in the price/earnings multiple, Pictet chief strategist Luca Paolini said.
Grace Peters, EMEA head of investment strategy at JPMorgan Private Bank, expects the S&P 500 - also tech heavy and currently trading at 21.1 times forward earnings - to end the year with an average P/E ratio a full percentage point lower.