NEW YORK, Oct 2 — Investors are focusing on Treasury yields as a key factor in determining how stocks will fare the rest of the year, after a month in which equities notched their steepest losses since the coronavirus pandemic began.
“Investors are looking for a catalyst ... and the catalyst that they are currently focusing on is the direction of interest rates,” said Sam Stovall, chief investment strategist at CFRA. Yet yield increases, such as the 27 basis point move logged by the 10-year benchmark note after the Fed meeting, could dim the allure of stocks. The 10-year yield was last around 1.47 per cent, paring back gains toward the end of the week.
A spread of between zero and 150 basis points is a “sweet spot” for stocks, which has been consistent with an 11 per cent annual return for the S&P 500, based on historical data, according to Ed Clissold, chief US strategist at Ned Davis Research. The S&P 500 has averaged a 9.1 per cent gain annually since 1945, according to CFRA’s Stovall.
The speed at which yields rise is also important, as is the economic and monetary policy backdrop, analysts at Goldman Sachs said. Higher yields pressure stock valuations by increasing the rate at which future cash flows are discounted, a typical way to value equities. Such pressure is especially acute for tech and other growth shares whose valuations rely more on future profits.