The notion that higher interest rates would slam stocks has been turned on its head by Wall Street’s resilience to the most dramatic upward repricing of the U.S. rate outlook in decades.
The correlation between the Nasdaq and U.S. bond yields, for example, has been strongly negative for most of the last two years. But that has completely flipped, and the Nasdaq’s simple rolling 25-day correlation with two- and 10-year U.S. yields is now the most positive since last April.Perhaps the most basic explanation is the U.S. economy is doing better than most people expected, as evidenced by the latest retail sales figures.
Earnings growth estimates for S&P 500 companies this year have sunk to zero, which Miran believes could rebound if growth holds up. And looking ahead to next year, consensus forecasts are now penciling in earnings growth of almost 12%.Market positioning is also a factor. According to Bank of America, investors’ exposure to U.S. equities at the start of the year was historically low, with fund managers the most underweight U.S. stocks since 2005.
Look at the contrasting fortunes of growth and value stocks: the Russell 1000 Growth index plunged 30% last year and is up 12% so far this year, while the Russell 1000 Value index fell 10% last year and is up only 5% year to date. In the first six weeks of this year the Nasdaq is up 15% and the Russell 1000 Growth index is up 12%. Crypto, speculative tech and meme stocks are up even more.
But this is unlikely to continue - holding short-term bonds over stocks is more attractive now than any time since the Great Financial Crisis, he says.
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