Equities should be able to withstand the recent increase in bond yields, which still has a way to go, according to JPMorgan Chase & Co. strategists.
“As long as yields are rising for the right reasons, including better growth, we believe that equities should be able to tolerate the move,” Mislav Matejka and colleagues wrote in a note. “The rise in real rates should not be hurting equity markets, or economic activity, at least until they move into positive territory, or even as long as real rates are below the real potential growth.”
Signs that the Federal Reserve may tighten its policy more aggressively than previously expected have made for a bumpy start to the year for equities. The Nasdaq 100 index lost 4.5% in the first week of 2022 as rapidly rising yields dealt a blow to more expensive stocks valued on future growth expectations.
JPMorgan strategists expect yields to keep rising, not least because demand for bonds will drop as the Fed winds down stimulus and the European Central Bank tapers asset purchases. While this means that sectors such as technology will “struggle to outperform going forward,” it spells good news for banks, autos and other cyclical areas of the equity market, they say.
“At the overall market level, we don’t see higher yields canceling the upside,” the JPMorgan strategists said, citing above-trend growth in developed markets and a looming economic rebound in China.
Not everyone is as sanguine. Goldman Sachs Group Inc. strategists led by David Kostin say equities typically struggle when the pace of the move in bond markets is too abrupt, as has been the case over the past week. And Morgan Stanley’s Michael Wilson feels the rout isn’t done playing out.
“We’ve never seen stocks this expensive for the overall market which means valuations are likely to come down more before we’re through with this correction,” Wilson wrote in a note.