The US stock market at the beginning of this year only slightly felt the potential damage from higher bond yields. The biggest challenges for the market are yet to come, writes Bloomberg, citing Morgan Stanley.
The correction in late January – early February was only a “snack, not a main course,” wrote bank strategists under the leadership of Andrew Sheets.
Although it was difficult for stock investors to “digest” the growth in bond yields, the key indicator of inflation-adjusted yields did not break out of the range observed over the past five years, strategists said in their report.
Many warn that accelerating inflation could hurt stocks. At the same time, theoretically, larger price increases should be neutral in the worst case, if companies simultaneously increase profits.
On the other hand, a higher real return means a greater discount to the assessment of future profits.
If real yields fall outside the range of the past five years, while investors expect greater normalization of monetary policy, this could hit stocks harder, warns Morgan Stanley.
The problem is that the slowdown in economic growth may begin to manifest itself more strongly in the II quarter, the bank's strategists wrote.
“When growth slows and inflation is still accelerating, revenues suffer the most,” they said. “Strong global economic growth and a good reporting season in the first quarter provided an important balance.
We continue to observe complex balancing in the II quarter amid rising core inflation and moderate activity indicators. "
Earlier in February, global stock indices fell after the Wall Street crash, as concerns about higher interest rates in the US undermined investor confidence.
The S&P 500 and Dow entered the correction area at the beginning of the month, dropping more than 10% from the record highs reached on January 26th.
Higher bond yields are seen as a negative factor for stocks, as they increase borrowing costs for companies and reduce risk appetite.
It also provides an alternative to investors who can redistribute some funds from stocks to bonds.