Stock Market Struggles as Rising Treasury Yields Pose Familiar Challenge

Stocks are facing a familiar problem as the market struggles to climb higher consistently despite better-than-expected earnings for the first quarter. The main challenge comes from rising Treasury yields, which have been weighing on sentiment for equities. Higher rates have become a systemic issue for stocks, leading to a decline in the S&P 500.

According to Piper Sandler chief investment strategist Michael Kantrowitz, the recent market action can be simplified to a basic formula: when Treasury yields rise, stocks fall. The 10-year Treasury yield has surged to 4.63%, its highest level since November 2023, causing the S&P 500 to drop about 3%.

Investors have heavily scaled back their bets on Federal Reserve interest rate cuts this year, shifting market expectations from nearly seven cuts to just one in 2024. This change has led to a rise in yields, with the two-year Treasury yield hitting a key technical level of 5%, impacting stocks’ performance.

Despite recent hot inflation readings, economists do not expect Fed Chair Jerome Powell to signal a rate cut during his upcoming press conference. Powell’s prior comments have brought little relief to the bond market, indicating that policy needs more time to work before any rate adjustments.

The rise in yields has also impacted stock valuations, with the S&P 500 down nearly 3% this month despite a strong first quarter earnings season. While companies have exceeded earnings estimates by an average of 9%, stock price reactions have been muted due to pressure on valuations from higher rates.

Looking ahead, strategists anticipate that certain parts of the equity market may lag if rates continue to climb. Stocks with weak balance sheets are likely to struggle, while the overall trend of ‘higher for longer’ rates could pose challenges for stocks in the near term.

Despite the current obstacles, analysts believe that stocks could still rise if rates stabilize or decline. Investors will be closely watching Powell’s press conference for any signals on the Fed’s future monetary policy decisions. Stay tuned for more updates on the stock market as events unfold.