Rising Treasury Yields Pose a Test for Richly Valued US Stocks

• Increasing Treasury yields are testing the ongoing rally in U.S. stocks, which have reached record highs, making them more expensive. This rally was partly fueled by expectations of Federal Reserve interest rate cuts, but rising yields are altering those expectations.
• Despite a strong economy and corporate earnings, concerns arise over stock vulnerability due to elevated valuations amidst climbing yields. Higher yields increase the attractiveness of Treasury bonds over equities and raise capital costs for businesses and households.
• Initially, there were expectations for significant Federal Reserve rate cuts in response to economic conditions. However, strong economic data has caused doubts regarding the extent of rate cuts the Fed will implement, impacting market sentiment.
• Various indicators suggest that stock market valuations are less favourable, with some investors predicting a long-awaited correction. The absence of significant market declines since October contrasts with historical trends, raising concerns.
• Stocks' response to rising yields hinges on perceptions of economic strength and inflation trends. If yields rise due to robust economic growth, investors may remain optimistic. However, slowing growth coupled with climbing inflation could unsettle investors. Key data releases, such as jobs reports and earnings season, will influence market sentiment in the near term.

(Source: Reuters)