As long as yields are rising for the right reasons, including better growth, we believe that equities should be able to tolerate the move,” writes JP Morgan analyst Mislav Matejka.
With bond yields reaching new peaks, many are worrying whether the market of lower risk and higher rewards will do to regular equities.
High bond yields, or a situation in which investors are anticipating rising interest rates and selling off stocks, can sometimes make equity investment less unattractive since the profit margin between stocks and bonds narrows while the different levels of risk do not.
But in a note to investors, a team of JP Morgan analysts led by Mislav Matejka write that “at the overall market level, we don’t see higher yields canceling the upside” as numerous sectors continue to soar in the post-pandemic recovery period.
A hawkish Federal Reserve, which is widely expected to raise interest rates soon, has been a major reason for the floundering equity market being seen at the start of 2022.
But as the Fed winds down the stimulus introduced to boost the economy throughout the pandemic, the equities market will follow a cyclical trajectory and once again correct itself.
According to the note, banks and automakers will see strong growth while the technology sector may flounder a bit longer to recover the boost it saw during the early days of the pandemic.
“As long as yields are rising for the right reasons, including better growth, we believe that equities should be able to tolerate the move,” Matejka writes. “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.”
