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  • Writer's pictureThe San Juan Daily Star

Strong US economic outlook buffers stocks against rising yields

A strong economic outlook is helping U.S. stocks weather a rise in Treasury yields, though that could change if factors such as tighter monetary policy drive yields higher or if they move up too fast, Goldman Sachs strategists said.

The S&P 500 and 10-year Treasury yield had been negatively correlated - meaning they have moved in opposite directions - since long-term yields began rising last July, Goldman equity strategists led by David Kostin said in their latest weekly kickstart note.

The S&P 500 sold off sharply over that period as yields marched to a 16-year high in October, making stocks relatively less attractive. Equities staged a swift rebound when yields, which move inversely to bond prices, tumbled in the final months of the year.

In 2024, however, stocks have hit record highs even as the 10-year yield has risen about 30 basis points to 4.2%.

One reason for stocks’ resilience is the improving economic outlook, Goldman’s strategists said.

Since 1990, the S&P 500 has generated a median monthly return of 1.3% when the yield curve steepens, their data showed.

Returns have been substantially stronger when economic growth expectations are improving rather than weakening, regardless of whether the yield curve steepened or flattened, the strategists said.

“As investors worry less about the potential for Fed tightening, growth expectations should become a more important driver of yields, contributing to a less negative correlation between stocks and yields in 2024,” they wrote.

In a separate note, Goldman’s economists raised their fourth-quarter economic growth estimate to 2.4% from 2.1%.

Goldman forecasts the S&P 500 will end 2024 at 5,100, a gain of just over 4% from Friday’s close. “However, if rates rise substantially from current levels because of shifts in Fed policy or the balance of Treasury supply and demand, equities will likely struggle,” the strategists said. Moreover, equities will face pressure if Treasury yields rise more quickly than the recent pace, regardless of the reason, they said, noting that rates could be more volatile with the 2024 election.

U.S. stocks rose modestly on Monday, with few catalysts to spark much conviction before this week’s slew of megacap earnings, economic data and the Federal Reserve’s monetary policy meeting.

The Nasdaq Composite Index and the S&P 500 advanced, with the latter poised to eke out yet another record closing high.

BlackRock raised its overall U.S. stocks view to “overweight” from “neutral.”

The Dow Jones Industrial Average was essentially unchanged.

A spate of earnings from high profile tech and tech-adjacent momentum stocks waits in the wings, starting on Tuesday with Alphabet Inc and Microsoft Corp, Qualcomm Inc and Wednesday and culminating on Thursday with Apple Inc, and Meta Platforms Inc.

“Investors are looking forward to 20% of the companies in the S&P 500 reporting earnings this week,” said Sam Stovall, chief investment strategist of CFRA Research in New York. “And with so many of the behemoths reporting this week, I think that will help investors to decide whether strong expectations will come true.”

Other closely watched results include General Motors Inc on Tuesday, Boeing Co on Thursday, with oil supermajors Exxon Mobil Corp and Chevron Corp wrapping up the week on Friday.

The Federal Open Markets Committee (FOMC) is scheduled to convene on Tuesday for its two-day monetary policy meeting, at which its voting members are widely expected to leave the key Fed funds target rate unchanged at 5.25% to 5.50%.

“The first question that investors will be trying to glean from the statement as well as press conference is whether the Fed will be cutting rates in March, May or even June,” Stovall added. “It’s our belief that rate cuts will be later and fewer that Wall Street is anticipating.”

Fed Chair Jerome Powell and other policymakers have warned not to expect interest rate cuts before inflation cools down to its average 2% annual target, but have also vowed to remain agile at they respond to economic data.

This week’s roster of economic reports includes the labor market, with the Job Openings and Labor Turnover Survey, ADP, fourth-quarter employment costs, productivity, and planned layoffs, and the January employment report on Friday.

Case-Shiller home prices, consumer confidence, the Institute for Supply Management’s (ISM) purchasing managers’ index (PMI), construction spending and factory orders are also on deck.

Robust economic data of late - particularly last week’s strong gross domestic product and personal consumption expenditures data - have simultaneously calmed fears of imminent recession and tossed cold water on hopes that the Fed would begin cutting interest rates as soon as March.

The S&P 500 climbed 0.24% to 4,902.83 points. The Nasdaq gained 0.53% at 15,537.08 points, while Dow rose 0.08% to 38,140.97 points.

Of the 11 S&P 500 sector indexes, eight rose, led by consumer discretionary, up 0.72%, followed by a 0.46% gain in communication services.

Tesla Inc gained 3.1% after the electric car maker revealed capex plans.

Robot dropped 7.0% as the robot vacuum maker and Amazon scrapped merger plans in the face of opposition from EU antitrust regulators.

Meta Platforms rose 1.6% after brokerage Jefferies raised its target price on the stock to $455 from $425.

Warner Bros Discovery lost 2.6% as brokerage Wells Fargo downgraded the streaming platform to “equal weight” from “overweight.”

Financial technology firm SoFi Technologies jumped 19.4% after posting a fourth-quarter profit.

Advancing issues outnumbered falling ones within the S&P 500 by a 1.1-to-one ratio.

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