. At the same time, yields on the U.S. benchmark 10-year Treasury stand near a 16-year peak at 4.55%.
If history is any indication, higher rates are a less favorable environment for equity investors. An analysis by AQR Capital Management going back to 1990 showed U.S. equities returned an average of 5.4% over cash when rates were above their median level - as they are now - compared with a return of 11.5% when interest rates were below their median.
The equity risk premium, which compares the attractiveness of stocks over risk-free government bonds, has been shrinking for most of 2023 and was last around its lowest levels in about 14 years, according to Keith Lerner, co-chief investment officer at Truist Advisory Services. Analysts at BofA Global Research argue that equities - specifically, the tech-heavy Nasdaq 100, which has soared 33% in 2023 in part due to excitement over advances in artificial intelligence - have until recently ignored the risk of rising rates.
Of course, plenty of investors believe the Fed will cut rates as soon as economic growth starts to wobble. Futures tied to the Fed’s key policy rate show investors pricing in the first rate cut in July 2024.