Investors may be “having a cake and eating it” in 2026, with Wall Street strategists predicting stock market gains driven by Fed rate cuts, tax incentives, and lower-than-expected inflation.
As Wall Street prepares for this week’s highly anticipated monthly Consumer Price Index report, which is expected to stay unchanged from the prior month at an annual increase of 2.7%, strategists are pointing to cheap oil prices and easing shelter costs as a sign that prices may be cooling.
“Our view is that inflation will surprise to the downside in 2026,” Longview Economics global economist and chief market strategist Chris Watling told Yahoo Finance last week.
It’s not all good news on the economic front. Last month’s employment report, released on Friday, showed the economy added fewer jobs than expected to cap a weak 2025.
But a cooling labor market gives the Federal Reserve reason to cut rates this year, which could push bond yields lower. That’s especially true if President Trump’s pick to replace Fed Chair Jerome Powell when his term ends in May shifts the central bank in a more dovish direction.
Lower yields mean cheaper borrowing costs, which can boost economic activity and keep corporate capital expenditures high.
“You could really get an economy pretty juiced as we go through this year, because you can have the capex, and you can have the sort of consumption starting to improve as housing fixes up and bond yields move lower,” Watling added. “This is what I call having a cake and eating it.”
Wall Street is already spotting “green shoots” as companies take advantage of the depreciation tax benefits from Trump’s One Big Beautiful Bill (OBBB) Act, signed into law in July.
“If you are a CFO of a company, and the OBBB allows you to get 100% depreciation for capex in one year … you will absolutely accelerate as much of your multi-year capex spend into 2026 as possible, or risk getting fired for missing those tax benefits,” Nomura Securities equity derivatives analyst Charlie McElligott wrote in a note last week.
Economic growth happens even as affordability challenges maintain a K-shaped divide, with the bottom half of consumers struggling to cover basic needs. In a nod to affordability ahead of the midterms, Trump recently criticized firms like Blackstone for buying single-family homes as investments, a hot-button issue for voters.
Rents have started to ease after years of relentless growth. That’s one reason Goldman Sachs expects the Personal Consumption Expenditures (PCE) index to trend toward the Fed’s 2% target. The firm also noted that the one-time price bump from last year’s tariffs is fading, which should further ease inflation.
“Healthy economic and revenue growth, continued profit strength among the largest US stocks, and an emerging productivity boost from AI adoption should lift S&P 500 EPS by 12% in 2026 and 10% in 2027,” Goldman’s Ben Snider wrote on Wednesday.
The latest data shows worker productivity in the third quarter grew at its fastest clip in two years, as businesses spent heavily on AI and pulled back on hiring.
That productivity boost is expected to broaden the stock market rally, as the S&P 500 (^GSPC) and Dow Jones Industrial Average (^DJI) touched all-time highs last week. Materials (XLB), Industrials (XLI), Energy (XLE), and Consumer Discretionary (XLY) were some of the leading sectors as investors trimmed tech exposure.
“We’re producing a lot more with less people,” RCM chief economist Joe Brusuelas told Yahoo Finance on Friday, though he believes the full impact of AI is still a couple of years away.
Wall Street strategists predict stock market gains in 2026 driven by Fed rate cuts, tax incentives, and lower-than-expected inflation. (AP Photo/Seth Wenig) ·ASSOCIATED PRESS
Against that backdrop, strategists are watching for sectors and companies positioned to benefit from leaner headcounts and growing AI adoption.
“Pay attention to high human capital businesses — so let’s say finance companies, retail companies, consulting, accounting type businesses,” Clark Capital CIO Sean Clark told Yahoo Finance recently.
“Quality value companies are now starting to experience the benefit of this AI revolution, driving earnings, driving productivity, [and] driving margins higher,” he added.
However, some warn that if the labor market is replaced by AI too quickly, it could pose a sudden threat to the broader economy.
“We term it as the dark side of AI,” Tim Urbanowicz, chief investment strategist at Innovative Capital Management, told Yahoo Finance. Urbanowicz estimates that 15%-20% of the layoffs at the end of last year were related to artificial intelligence.
“If you start to see the jobs market or labor market starting to be replaced by AI in a major way, we think that becomes problematic,” he added.
StockStory aims to help individual investors beat the market.
Ines Ferre is a senior business reporter for Yahoo Finance. Follow her on X at @ines_ferre.
An unexpected result in Japan’s leadership contest over the weekend rippled through global financial markets with the dollar surging against the yen on Sunday.
Markets had expected the more fiscally cautious Shinjiro Koizumi to win. But the LDP’s decision to go with Takaichi, who favors looser fiscal and monetary policies, could raise expectations that Tokyo will issue more debt while the central bank rethinks rate hikes.
With Japan’s debt burden already more than 200% of its GDP, the prospect of more debt-fueled stimulus spending could cause investors to demand higher rates on long-term bonds.
That in turn could add more upward pressure on bond yields elsewhere, like the U.S., which relies heavily on Japanese investors as top buyers of Treasury debt.
The yield on the 10-year Treasury rose 1.9 basis points to 4.138%. The U.S. dollar was up 1.5% against the yen and up 0.2% against the euro.
Futures tied to the Dow Jones Industrial Average rose 40 points, or 0.1%. S&P 500 futures were up 0.18%, and Nasdaq futures added 0.27%. Japan’s Nikkei 225 index jumped 4% to a record high.
U.S. oil prices rose 1.35% to $61.70 per barrel, and Brent crude added 1.3% to $65.37. Gold edged up 0.47% to $3,927.30 per ounce.
Takaichi is expected to formally become prime minister in a parliamentary vote later this month, and her approach to President Donald Trump will also be scrutinized.
While she previously suggested Japan renegotiate the trade deal it struck with the U.S. this summer, Takaichi toned down her rhetoric after securing the LDP leadership spot on Saturday, saying that’s not on the table now.
Meanwhile, financial markets must continue to grapple with the ongoing government shutdown, which shows no signs of ending anytime soon and will keep key economic indicators under wraps.
That leaves Wednesday’s release of minutes from the Federal Reserve’s last policy meeting as the main economic report to watch in the coming week as the central bank is self-funded and unaffected by the shutdown.
Several Fed officials are also scheduled to speak throughout the coming week, including Chairman Jerome Powell on Thursday.
Because the government shutdown prevented the Bureau of Labor Statistics from issuing its jobs report for September on Friday, Wall Street is turning to alternate gauges from the private sector.
“The bottom line is that not having the BLS jobs data is a serious problem for assessing the health of the economy and making good policy decisions,” he said in a series of posts on X. “But the private sources of jobs data are admirably filling the information gap, at least for now. And this data shows that the job market is weak and getting weaker.”
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FILE – In this Jan. 2, 2020, file photo traders monitor stock prices at the New York Stock Exchange. The U.S. stock market opens at 9:30 a.m. EST on Thursday, Jan. 9. (AP Photo/Mark Lennihan, File)Associated Press
Albert Edwards warns of a tech stock bubble amid high valuations.
The tech sector is now 37% of the US stock market, surpassing the dot-com era peak.
But rising bond yields will eventually stop the rally, Edwards said.
Like the high market valuation levels he warns about, Société Générale strategist Albert Edwards‘ bearish missives don’t tend to serve well as near-term market timing tools.
He acknowledges as much.
“An equity investor who heeded my words of caution on the US Tech ‘bubble’ will by now have taken to sticking pins in plasticine models of me,” Edwards wrote in an August 21 note to clients. “Indeed, my ankle has been hurting for over six months and although the physio says it is tendonitis, I strongly suspect otherwise.”
But there’s no denying that Edwards, a stark contrarian amid the pervasively bullish attitude on Wall Street these days, has some concerning observations about where the market sits — particularly with respect to tech stocks, and in the context of government bond yields.
Building on his argument that the market is in a bubble, he highlighted in his latest note that the tech sector now makes up 37% of the total US market, which is higher than at the peak of the dot-com bubble in 2000. Over the last few years, investors have piled into tech amid the frenzied excitement about AI.
SOCIETE GENERALE
Another metric showing that the tech sector has historically high valuations is a falling free cash flow yield. This means that current market prices are high relative to cash flow after expenses as tech firms dump money into AI development. The sector has a free cash flow yield of around two. This is also reflected in the S&P 500’s low dividend yield of 1.2%.
Meanwhile, long-term government bond yields have surged at the same time as the tech rally, and offer virtually risk-free yields of over 4%.
The ratio of 10-year Treasury yields to the market’s dividend yield has climbed to dot-com era levels.
SOCIETE GENERALE
Historically, rising bond yields have weighed on stock valuations, but that hasn’t seemed to be the case so far in this market. Edwards says it’s only a matter of time until that changes.
“Only the other day, interest rates were rock bottom and equity bulls were telling us that sky high equity valuations were justified by TINA — There Is No Alternative,” he wrote. “But that TINA magic no longer works, now that interest rates are so much higher. So, how come the equity market is able to shrug off the relentless rise in long bond yields by feeding off news of strong profits from a handful of mega-cap tech stocks and the promise of more to come?”
“Surely we can all agree that rising bond yields will break the equity market at some point? But when?” he continued, adding: “Goodbye to the post-GFC TINA world when equities yielded almost as much as bonds and hello to an ever more stretched elastic band which will surely eventually snap.”
Bond yields could be on the way down after Federal Reserve Chair Jerome Powell took on a dovish tone in his speech in Jackson Hole, Wyoming, on Friday. Lower rates are typically bullish for stocks, and the S&P 500 rallied around 1.5% on Friday after Powell’s remarks.
However, it remains unclear how much the central bank will slash rates in the year ahead and how the labor market, consumer spending, and inflation will fare as the economy digests higher tariff rates.
So for now, as he wrote on Thursday, Edwards will keep wondering: “How big could this bubble get?”
(Reuters) – A look at the day ahead in Asian markets.
Global markets will be overwhelmingly dominated by the U.S. presidential election and interest rate decision later this week, so Monday’s activity may be driven by position adjustments as investors take in the latest polls, newsflow, earnings and economic indicators.
If Friday’s moves are any guide, Monday promises to be something of a rollercoaster with no clear, unifying signal. Bond yields shot up to fresh multi-month highs on election and fiscal jitters, reversing an earlier fall on the back of surprisingly weak U.S. employment data, and the dollar duly strengthened.
But Wall Street shrugged off any political or deficit fears. Latching onto strong earnings and a renewed conviction that the Fed will cut rates on Thursday – and probably again next month – stocks rallied strongly.
Can this ‘risk on’ sentiment prevail with the U.S. election so close, and with bond yields on the rise not just in the US but around the world?
The ‘MOVE’ index of implied volatility in U.S. Treasuries is the highest in over a year, and British gilt yields are the highest in a year too. The ‘bond vigilantes’ suffered a bit of whiplash after the U.S. payrolls data on Friday, but soon took charge again.
So traders in Asia on Monday will have to weigh up whether they go with upbeat U.S. earnings and rate cut optimism, or hunker down in the face of rising yields, a stronger dollar and heightened nervousness on the eve of the U.S. election.
Last week was challenging for Asian markets. The MSCI Asia/Pacific ex-Japan index fell for a fourth week in a row last week, and October’s slide of 4.9% marked the worst month since August last year.
After taking in $32.2 billion inflows in September, Asia ex-Japan equity funds recorded “heavy redemptions” in the last three weeks, according to flows tracker EPFR. The latest week saw investors pull over $4 billion from Asia ex-Japan equity funds, extending their longest outflow streak since the fourth quarter of last year.
Much of that is down to outflows from China funds as some of the hyper excitement sparked by Beijing’s raft of measures to support the domestic economy and markets cools off.
But attention will once again center on Beijing this week. China’s top legislative body the National People’s Congress meets on Nov. 4-8, with markets widely expecting the approval of more fiscal stimulus measures.
This week also sees the release of Chinese economic indicators including trade and lending. Other highlights include interest rate decisions from Australia and Malaysia, GDP figures for Indonesia and the Philippines, and earnings from Toyota and Nissan.
Japanese markets are closed for Culture Day on Monday so yen liquidity will be thinner than usual, and yen trading could be choppy, especially given the upward pressure on long-dated yields overseas.
Here are key developments that could provide more direction to markets on Monday:
– India manufacturing PMI (October)
– U.S. presidential election polls
– U.S. bond market weakness
(Reporting by Jamie McGeever, editing by Deepa Babington)
(Bloomberg) — Stocks struggled for direction as traders weighed prospects of a slower pace of Federal Reserve rate cuts. Treasury 10-year yields hovered near 4.2%.
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Wall Street are paring back bets on aggressive policy easing as the US economy remains robust and Fed officials have sounded a cautious tone over the pace of future rate decreases. Rising oil prices and the prospect of bigger fiscal deficits after the upcoming presidential election are only compounding the market’s concerns. Since the end of last week, traders have trimmed the extent of expected Fed cuts through September 2025 by more than 10 basis points.
“Of course, higher yields do not have to be negative for stocks. Let’s face it, the stock market has been advancing as these bond yields have bee rising for a full month now,” said Matt Maley at Miller Tabak + Co. “However, given how expensive the market is today, these higher yields could cause some problems for the equity market before too long.”
Exposure to the S&P 500 has reached levels that were followed by a 10% slump in the past, according to Citigroup Inc. strategists. Long positions on futures linked to the benchmark index are at the highest since mid-2023 and are looking “particularly extended,” the team led by Chris Montagu wrote in a note.
“We’re not suggesting investors should start to reduce exposure, but the positioning risks do rise when markets get extended like this,” they said.
The S&P 500 was little changed. The Nasdaq 100 rose 0.1%. The Dow Jones Industrial Average added 0.1%. The Russell 2000 of smaller firms slipped 0.2%. Texas Instruments Inc., which gets almost three-quarters of its revenue from industrial and automotive chips, reports results after the market close.
Treasury 10-year yield was little changed at 4.20%. Oil advanced as traders tracked tensions between Israel and Iran. Gold climbed to a fresh record. Options traders are increasing bets that Bitcoin will reach a record high of $80,000 by the end of November no matter who wins the US presidential election.
The stock market has rallied this year thanks to a resilient economy, strong corporate profits and speculation about artificial-intelligence breakthroughs — sending the S&P 500 up over 20%. Yet risks keep surfacing: from a tight US election to war in the Middle East and uncertainty around the trajectory of Fed easing.
“While recent data indicate a more resilient US economy than previously thought, the broad disinflation trend is still intact, and downside risks — albeit lower — to the labor market remain,” said Solita Marcelli at UBS Global Wealth Management. “We continue to expect a further 50 basis points of rate cuts in 2024 and 100 basis points of cuts in 2025. This should bring Treasury yields lower.”
A string of stronger-than-estimated data points sent the US version of Citigroup’s Economic Surprise Index to the highest since April. The gauge measures the difference between actual releases and analyst expectations.
“On the back of September’s strong economic data, markets have already priced a slower pace of cuts,” said Lauren Goodwin at New York Life Investments. “If the Fed is able to move towards a 4% policy rate — still above the levels most believe represent the ‘neutral’ rate — then the equity market rally can continue. Disruptions to that view make equity market volatility more likely.”
Most Fed officials speaking earlier this week signaled they favor a slower tempo of rate reductions. Policymakers at their meeting last month began lowering rates for the first time since the onset of the pandemic. They cut their benchmark by a half percentage point, to a range of 4.75% to 5%, as concern mounted that the labor market was deteriorating and as inflation cooled close to the Fed’s 2% goal.
“We can point to a few reasons for the rise in global long rates but one possibility is that markets are giving a big thumbs down to central banks easing policy before we’ve seen a sustainable drop in inflation.” said Peter Boockvar author of The Boock Report. “I remain bearish on the long end and bullish on the short end.”
The last time US government bonds sold off this much as the Fed started cutting interest rates, Alan Greenspan was orchestrating a rare soft landing.
Two-year yields have climbed 34 basis points since the Fed reduced interest rates on Sept. 18 for the first time since 2020. Yields rose similarly in 1995, when the Fed — led by Greenspan — managed to cool the economy without causing a recession.
In prior rate cutting cycles going back to 1989, two-year yields on average fell 15 basis points one month after the Fed started slashing rates.
Meantime, the International Monetary Fund said the US election is creating “high uncertainty” for markets and policymakers, given the sharply divergent trade priorities of the candidates. That gap creates the risk of another potential round of volatility on global markets similar to the rattling August selloff.
“Presidents don’t control markets,” said Callie Cox at Ritholtz Wealth Management. “Over time, the stock market’s common thread has been the economy and earnings, not who’s in the Oval Office. Be prepared for mood swings in markets as we get closer to Election Day. But remember that election-fueled storms often dissipate quickly.”
As the earnings season rolls in, US companies are reaping the best stock-market reward in five years for beating profit expectations that were lowered in the run-up to the reporting season.
S&P 500 firms that posted better-than-estimated third-quarter earnings have outperformed the benchmark by a median of 1.74% on the day of reporting results, according to data compiled by Bloomberg Intelligence. That’s the strongest rate in BI’s records going back to 2019.
At the same time, companies missing estimates trailed the S&P 500 by a median of 1.5%, a less severe underperformance than the 1.7% experienced in the second quarter, the data showed.
“This earnings season we are watching what companies are saying about inflation and the economy,” said Megan Horneman at Verdence Capital Advisors. “In addition, their view on interest rates, especially if the Fed cannot be as aggressive as the market is pricing in at this point. It is good to see analysts getting realistic about 2025 earnings growth. However, at 15% earnings growth, we believe it is still too optimistic given the expectation for slower economic growth in 2025.”
Corporate Highlights:
Verizon Communications Inc. reported revenue that missed analysts’ expectations, weighed down by lackluster sales of hardware such as mobile phones.
3M Co. increased the low end of its 2024 profit forecast and reported earnings that topped analyst estimates as a push to boost productivity gained traction.
General Motors Co. signaled solid US demand for its highest-margin vehicles even as the broader market softens, posting better-than-expected results for the latest quarter and raising the low end of its full-year profit forecast.
General Electric Co.’s sales fell short of Wall Street’s expectations last quarter, tempering enthusiasm for its improved profit outlook as the jet engine maker grapples with supply-chain limitations that are weighing on deliveries.
Kimberly-Clark Corp., owner of the Scott toilet paper brand, lowered its full-year organic sales forecast after reporting weaker-than-expected results.
Philip Morris International Inc. forecast higher-than-expected profit this year, citing soaring demand for its Zyn nicotine pouches in the US.
Lockheed Martin Corp.’s third-quarter revenue missed expectations, pulled down by weaker aeronautical sales and ongoing issues with its F-35 fighter jet program.
Zions Bancorp’s third-quarter adjusted net interest income came in ahead of estimates. Morgan Stanley said the results beat across the board and sees the positive trajectory in net interest income continuing into 2025.
L’Oreal SA posted disappointing sales last quarter as the beauty company suffers from worsening consumer demand in China.
An investigation of Huawei Technologies Co.’s latest AI offering has unearthed an advanced processor made by Nvidia Corp. manufacturing partner Taiwan Semiconductor Manufacturing Co., suggesting that China is still struggling to reliably make its own advanced chips in sufficient quantities.
Key events this week:
Canada rate decision, Wednesday
Eurozone consumer confidence, Wednesday
US existing home sales, Wednesday
Boeing, Tesla, Deutsche Bank earnings, Wednesday
Fed’s Beige Book, Wednesday
US new home sales, jobless claims, S&P Global Manufacturing and Services PMI, Thursday
UPS, Barclays earnings, Thursday
Fed’s Beth Hammack speaks, Thursday
US durable goods, University of Michigan consumer sentiment, Friday
Some of the main moves in markets:
Stocks
The S&P 500 was little changed as of 1:47 p.m. New York time
The Nasdaq 100 rose 0.1%
The Dow Jones Industrial Average rose 0.1%
The MSCI World Index fell 0.2%
The Russell 2000 Index fell 0.2%
Currencies
The Bloomberg Dollar Spot Index was little changed
The euro fell 0.1% to $1.0803
The British pound was little changed at $1.2983
The Japanese yen fell 0.1% to 151.02 per dollar
Cryptocurrencies
Bitcoin fell 0.6% to $67,338.79
Ether fell 1.9% to $2,625.07
Bonds
The yield on 10-year Treasuries was little changed at 4.20%
Germany’s 10-year yield advanced four basis points to 2.32%
Britain’s 10-year yield advanced three basis points to 4.17%
Commodities
West Texas Intermediate crude rose 2.3% to $72.21 a barrel
Spot gold rose 1% to $2,748.02 an ounce
This story was produced with the assistance of Bloomberg Automation.
(Reuters) – A look at the day ahead in Asian markets.
Asian markets on Monday get their first chance to react to the extraordinary market moves on Friday that saw stocks and bond yields tumble, and volatility and rate cut expectations soar following an unexpectedly soft U.S. employment report.
That ‘risk off’ sentiment and momentum is sure to spill over into Asia, which was already wobbling last week after the Bank of Japan’s hawkish policy tilt, yet more sluggish Chinese economic data and some weak U.S. tech earnings.
The MSCI Asia ex-Japan stock index slumped 2.5% on Friday, its biggest fall in over two years, and Japan’s Nikkei 225 index tanked 5.8% for its biggest fall since March 2020. Japan’s broader Topix’s 6.1% slide marked its worst day since 2016.
Given Friday’s U.S. payrolls-fueled selling on Wall Street, a sharp selloff in Asia early Monday is likely. Friday’s market gyrations may prove to be excessive, but they are worth noting.
The two-year U.S. Treasury yield plunged 30 basis points, its steepest one-day fall since the U.S. regional banking shock of March last year. Its weekly fall of 50 bps is in line with those seen in the COVID-19, Lehman, 9/11 and Black Monday crises.
In equities, the VIX volatility index at one point on Friday had doubled from the previous day.
The stampede to unwind carry trades helped push the yen up nearly 5% against the dollar last week – the Japanese currency has only had three better weeks in the past 25 years.
Plunging U.S. bond yields may ease financial conditions – Goldman Sachs’s emerging market financial conditions index on Friday fell to its lowest since March – but they’re loosening for ‘bad’ reasons, namely recession fears.
Hopes for the much-vaunted U.S. economic ‘soft landing’ appear to have completely evaporated, replaced by fears of a ‘hard landing’.
Traders are now attaching a 70% chance to the Fed cutting rates by half a percentage point next month, and are pricing in 115 basis points of easing by the end of the year and over 200 bps by next June.
High yield corporate debt markets will be worth watching closely. This is where the first signs of a ‘credit event’ usually appear, heralding wider retrenchment across businesses, rising unemployment and ultimately recession.
High yield U.S. debt spreads over Treasuries jumped on Friday to the widest of the year of more than 370 bps, but that was mostly due to the slump in government bond yields rather than investors dumping corporate debt. If that dynamic changes, hold onto your hats.
Monday’s economic and events calendar in Asia includes service sector purchasing managers index data from across the continent including China, inflation figures from Thailand, GDP numbers from Indonesia and some Japanese earnings.
Here are key developments that could provide more direction to markets on Monday:
– China ‘unofficial’ services PMI (July)
– Thailand consumer price inflation (July)
– Indonesia GDP (Q2)
(Reporting by Jamie McGeever; Editing by Diane Craft)
(Bloomberg) — As world financial markets started to reopen after the attempted assassination of Donald Trump, one thing seemed likely: The Trump trade will get even more momentum.
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The series of wagers — based on anticipation that the Republican’s return to the White House would usher in tax cuts, higher tariffs and looser regulations — had already been gaining ground since President Joe Biden’s poor performance in last month’s debate imperiled his re-election campaign.
But the trades were expected to take deeper hold, with Trump galvanizing supporters and drawing sympathy by exhibiting defiant resilience after being shot in the ear on stage at a Pennsylvania rally.
The dollar — which would gain if loose fiscal policy kept bond yields elevated — started to move higher against most peers early in Asia trading. Bitcoin rose above $60,000, potentially reflecting Trump’s crypto-friendly stance.
“For us, the news does reinforce that Trump’s the frontrunner,” said Mark McCormick, global head of foreign-exchange and emerging-market strategy at Toronto Dominion Bank. “We remain US dollar bulls for the second half and early 2025.”
The specter of political violence in the US may cause investors to push into haven assets, potentially overshadowing some of the positioning that has already been going on around the presidential campaign.
Treasuries tend to rally when investors seek temporary safety, so that may distort the Trump trade in the bond market, which hinges on wagering that the yield curve will steepen as long-term bonds underperform on anticipation that Trump’s fiscal and trade policies will fan inflation pressures. Moreover, some investors may want to book early gains or be wary of getting deeper into an already crowded position.
“Political risk is binary and hard to hedge, and uncertainty was high as it is with the close nature of the race,” said Priya Misra, a portfolio manager at JPMorgan Investment Management.
“This adds to volatility. I think it further increases the chance of a Republican sweep,” she said, adding that “could put steepening pressure on the curve.”
Equity investors are preparing for at least a near-term jump in volatility when S&P 500 futures start trading at 6 p.m. in New York.
While traders generally don’t expect Trump’s assassination attempt to derail the stock-market trajectory in the long run, a pick-up in near-term price swings is likely. The market has already been contending with speculation that valuations have become too stretched, given the boom in artificial-intelligence stocks and the risks posed by elevated interest rates and political uncertainty.
But investors have also been anticipating that bank, health-care and oil-industry stocks would benefit from a Trump victory.
“The unprecedented nature of the attack will boost volatility,” said David Mazza, CEO at Roundhill Investments, predicting investors could seek temporary safety in defensive stocks like mega-cap companies. He said it “also adds support for stocks that do well in a steepening yield curve, especially financials.”
The early reaction echoes what was seen after the first presidential debate in late June, when Biden’s weak performance was seen as fueling Trump’s election odds.
The dollar advanced during that event, and investors soon began embracing a wager that involves buying shorter-maturity notes and selling longer-term ones — known as a steepener trade. That trade has been paying off, with the 30-year Treasury yields jumping to nearly 5 basis points below 2-year ones from around 37 basis points below ahead of the debate.
“If the market sense that Trump’s chances to win are higher than they were on Friday – then we would expect the back end of the bond market to sell off in the manner we saw in the immediate aftermath of the debate,” Michael Purves, CEO and founder of Tallbacken Capital Advisors, wrote in an email.
While bond traders have been pricing in at least two interest-rate reductions in 2024, a major boost in Trump’s election odds could push the Federal Reserve toward staying on hold for longer, according to Purves.
“Trump’s stated policies are (at least now) more inflationary than Biden’s,” he wrote, “and we think the Fed will want to accumulate as much dry power as possible.”
–With assistance from Liz Capo McCormick, Isabelle Lee, Sid Verma, Edward Dufner, Esha Dey and Michael G. Wilson.
(Bloomberg) — A slide in bonds dragged down stocks as another weak sale of Treasuries raised concern about swelling supply that could keep driving yields up at a time when the Federal Reserve is in no rush to cut rates.
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Traders also sifted through the Fed’s latest Beige Book survey of regional business contacts, which said economic activity expanded — and most districts saw slight growth. The report also said that prices increased at a modest pace, while employment rose slightly.
Federal Reserve May Beige Book Summary (Text)
The US sold $44 billion of seven-year notes at 4.650% — above the pre-auction level of 4.637%. That’s just a day after two other US offerings totaling $139 billion saw tepid demand. Those bond sales are exerting a growing sway over several asset classes, underscoring how the uncertainties over Fed policy continue to grip markets as inflation shows little signs of moderation.
“Similar to yesterday’s poor 5-year auction, today’s 7-year was weak as well and after a mediocre 2-year,” said Peter Boockvar at The Boock Report.
Treasury 10-year yields climbed six basis points to 4.61%. The dollar advanced against all of its developed-market peers.
The S&P 500 dropped below 5,300. American Airlines Group Inc. tumbled on a disappointing outlook. UnitedHealth Group Inc. led industry losses after saying it sees a “disturbance” coming as states pare enrollees in their Medicaid programs. Marathon Oil Corp. surged as ConocoPhillips agreed to acquire it in a $17 billion deal. BHP Group abandoned its bid for Anglo American Plc.
“Not only are yields rising again in the US, but they are moving higher in other parts of the world,” said Matt Maley at Miller Tabak + Co. “That is not good news for a stock market that’s trading at 22 times forward earnings.”
European bond issuance this year has topped the €1 trillion ($1.1 trillion) mark more than a week before the previous record. German bond yields hit a six-month high as inflation accelerated. Australia’s latest inflation reading suggested rates will remain high for now.
Fed Chair Jerome Powell and his colleagues have stressed the need for more evidence that inflation is on a sustained path to their 2% goal before cutting the benchmark interest rate, which has been at a two-decade high since July.
“We continue to believe that US sovereign yields should end the year lower as inflation and economic growth slow and the Fed cuts rates in the last months of the year,” said Solita Marcelli at UBS Global Wealth Management.
Meantime, the options market is betting that the S&P 500 will see muted swings following this week’s bond auctions and the Fed’s favorite underlying inflation gauge Friday, with traders instead looking ahead to next month’s reading on consumer prices and the central bank’s upcoming meeting.
The benchmark equities gauge is implied to move just 0.5% in either direction following the personal consumption expenditures price index, based on the cost of at-the-money puts and calls, per Stuart Kaiser, Citigroup Inc.’s head of US equity trading strategy.
The reading is less than the implied move on June 7 — the next jobs report — and CPI and the Fed’s upcoming rate decision — both on June 12, which would be the largest ahead of a central bank meeting since December, Kaiser said.
Economists expect the PCE minus food and energy to rise 0.2% in April. That would mark the smallest advance so far this year for the measure. The overall PCE price index probably climbed 0.3%. Increases this year stand in contrast to relatively flat readings in the final three months of 2023, underscoring uneven progress for the Fed in its inflation fight.
Bank of America Corp. clients were net sellers of US equities for a fourth consecutive week as they offloaded $2 billion dollars worth of shares during the five-day period ended last Friday.
Outflows came chiefly from hedge funds and retail investors as institutions were net buyers, quantitative strategists led by Jill Carey Hall wrote.
Hedge funds’ exposure to US technology behemoths hit a record high following Nvidia Corp.’s estimate-thumping earnings report last week, according to Goldman Sachs Group Inc.’s prime brokerage.
The so-called Magnificent Seven companies — Nvidia, Apple Inc., Amazon.com Inc., Meta Platforms Inc., Alphabet Inc., Tesla Inc. and Microsoft Corp. — now account for about 20.7% of hedge funds’ total net exposure to US single stocks, the report showed.
Corporate Highlights:
Exxon Mobil Corp. investors voted in line with board recommendations on all shareholder proposals at its annual meeting Wednesday despite vocal opposition to the company’s lawsuit against activists.
Abercrombie & Fitch Co. shares jumped after the retailer blew past first-quarter sales estimates, extending its bounce back from the teen fashion graveyard.
Dick’s Sporting Goods Inc. raised its outlook for the year and reported sales that surpassed analysts’ estimates with strong demand for sports gear across categories.
Robinhood Markets Inc. announced a plan to repurchase as much as $1 billion of its own shares.
Lenovo Group Ltd. plans to sell $2 billion worth of zero-coupon convertible bonds to Saudi Arabia’s sovereign wealth fund, part of a broader strategic pact with the tech-hungry kingdom.
The benchmark 10-year Treasury yield is hovering below levels that caused a massive crash last fall.
Yet, persistent inflation and weak Treasury auctions could boost yields past the 5% mark.
Once this threshold is crossed, investors could be in for a sharp correction in stocks.
Treasury bonds might not be the most high-octane trade, but yields rising not that far from current levels could eventually make things all but boring.
While this year’s equity momentum has kept Wall Street distracted, the benchmark 10-year rate has crept up as much as 83 basis points since 2023.
That’s taken it as high as 4.7% in April, not far from the threshold level that broke markets last fall: 5%. When this 16-year high was breached in October, it triggered one of history’s worst market crashes. While Treasurys fell on Friday after a so-so jobs report, markets are still warily eyeing further moves upward amid sticky inflation and broad economic strength.
Could a rerun of 5% yields happen? For analysts, it all hinges on fiscal policy and inflation.
Where yields are headed
“Bond king” Bill Gross is among those touting caution, telling investors that high federal borrowing will push yields to 5% levels within the next 12 months.
Yields move inversely to bond prices, meaning that lackluster demand sends rates up. That’s why Treasury auctions have become attention-grabbers for markets, as investors watch to see if there are enough willing buyers.
“Sloppy” auctions are what caused the bond rout last fall, market veteran Ed Yardeni told Business Insider. Many buyers have been turned off by America’s exploding debt, and with few efforts to clamp it down, more disappointing auctions could be in store, he said.
Both the Treasury Department and Federal Reserve have made liquidity adjustments this week to take pressure off buyers, but it’s to be seen whether these efforts are enough.
In the case 5% is ever breached for this reason, the Yardeni Research president said it could go differently: “This time, you know, we may find that 5% lingers and then we’ll all be wondering whether the next move is towards six, or back to four.”
Investment firm SEI had similar concerns in April, and added that this year’s stubborn inflation data only compounds the problem in the near term. With consumer prices remaining elevated, interest rates have stayed put, halting a rush to buy fixed-income:
“We would not be surprised to see the 10-year Treasury yield retest the 5% level even with the prospect of rate cuts on the horizon,” it wrote in a note.
But to Eric Sterner of Apollon Wealth Management, more pessimism would have to hit markets to justify a move past 5%. Only if inflation pushes the Fed to hike interest rates would that be a concern, but that doesn’t seem likely.
Still, yields aren’t coming down any time soon while inflation stays sticky, he told BI:
“If we can get that one rate cut in, potentially we can get closer down to 4%,” he said. “But I don’t think we’re getting below 4%.”
The dangers of 5%
When 10-year yields broke through the 5% mark last fall, traders panicked and the S&P 500 nosedived nearly 6% from October’s peak-to-trough.
Some of that is on account of how quickly the yield moved up, Yardeni said, which is not the case this time around.
“It’s been a more stealth kind of move, happening at a more slow pace; it hasn’t gotten anybody’s attention in the stock market,” he said. “Even the growth stocks have done well, even though they’re not supposed to do well when bond yields are going up.”
But moving past 5% could change that. According to a Goldman Sachs note, highs beyond 5% have historically triggered negativity for stocks. In 1994, even strong earnings had difficulty pushing equities up against higher yields.
Even Sterner agreed that it’s a risk, though only in the short term: “Hypothetically speaking, if we do cross 5%, I think that could trigger a market correction or a sell off of 10% or more.”
(Bloomberg) — Stocks fell and bond yields rose amid speculation that the Bank of Japan will soon scrap the world’s last negative interest-rate regime.
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The yen strengthened 1% against the dollar and Japan’s 10-year yield jumped as much as 13 basis points. Investors are speculating that higher rates could come earlier than expected following comments from BOJ Governor Kazuo Ueda on more challenging policy ahead and a weak auction of long-term debt.
Global markets moved in response, with European stocks opening lower. The yield on 10-year US Treasuries added seven basis points and the dollar fell for the first time in four days.
“When it comes to the last 24 hours, markets have seen a sharp reversal in tone, with bond yields seeing a significant increase overnight and equities losing ground,” said Jim Reid at Deutsche Bank AG.
“The main catalyst for this have been comments from Bank of Japan officials, which have suddenly seen investors ramp up the chances that the BoJ could bring an end to their negative interest rate policy.”
Overnight-indexed swaps at one point on Thursday showed an almost 45% chance that the BOJ would end the policy this month.
Traders are also focused on Friday’s US jobs report after private payrolls data that fell short of estimates in a sign of softening in the employment market.
Fed policymakers meet next week for the last time in 2023. While no change is expected in their target for the federal funds rate, they are scheduled to release quarterly forecasts that could alter market-implied expectations. Those bets have been gravitating toward more easing next year in response to weaker-than-forecast economic data.
“Inflation fears are melting,” said Prashant Newnaha, a rates strategist at TD Securities. “Central banks believe they have clearly done enough and may need to cut, otherwise real rates may be too high and restrictive.”
Oil stabilized after a five-day run of losses on signs that global supplies are eclipsing demand despite plans by OPEC+ to rein in its production into 2024. A key gauge for prices of raw materials earlier tumbled to the lowest level since August 2021.
Elsewhere, gold extended Wednesday’s gains, while bitcoin traded just below $44,000, a level not seen since June last year.
Key events this week:
Eurozone GDP, Thursday
Germany industrial production, Thursday
US wholesale inventories, initial jobless claims, Thursday
Germany CPI, Friday
Japan household spending, GDP, Friday
Reserve Bank of Australia’s head of financial stability Andrea Brischetto speaks at Sydney Banking and Financial Stability conference, Friday
US jobs report, University of Michigan consumer sentiment, Friday
Some of the main moves in markets:
Stocks
The Stoxx Europe 600 fell 0.2% as of 8:03 a.m. London time
S&P 500 futures were little changed
Nasdaq 100 futures were little changed
Futures on the Dow Jones Industrial Average were little changed
The MSCI Asia Pacific Index fell 0.4%
The MSCI Emerging Markets Index fell 0.5%
Currencies
The Bloomberg Dollar Spot Index fell 0.2%
The euro rose 0.1% to $1.0778
The Japanese yen rose 1.1% to 145.64 per dollar
The offshore yuan rose 0.2% to 7.1609 per dollar
The British pound rose 0.2% to $1.2581
Cryptocurrencies
Bitcoin was little changed at $43,828.74
Ether rose 0.6% to $2,260.95
Bonds
The yield on 10-year Treasuries advanced six basis points to 4.16%
Germany’s 10-year yield advanced two basis points to 2.22%
Britain’s 10-year yield advanced six basis points to 4.00%
Commodities
Brent crude rose 0.9% to $74.94 a barrel
Spot gold rose 0.2% to $2,029.03 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Rita Nazareth, Jing Jin and Yumi Teso.
Stocks will see a year-end rally, continuing November’s historical trend as a strong month for the market.
Jeremy Siegel says bond yields are near their peak and the end of a historic sell-off is in sight.
The upcoming FOMC meeting won’t change much for investors as the Fed is likely to leave rates unchanged.
The sell-off in stocks in the past few months has investors fretting over their 2023 gains, but if history is any guide, investors are about to enter a historically strong month that could help propel equities to a year-end rally.
That’s according to Wharton professor Jeremy Siegel, who says strong seasonality and a handful of key developments will set stocks up for gains as 2023 winds down.
“In the last 25 years, November is the second-best month of the year, just slightly behind April,” he told CNBC on Monday. “So I do think we’re going to have a year-end rally coming up.”
“I think valuation is persuasive,” he added. “I actually think growth is going to be better next year, and I think that the higher real interests we’ve seen is optimism about growth in 2024. And that’s going to pressure the stock market because it has to discount those higher earnings, but I think those higher earnings are going to come through.”
“The Fed is certainly not going to do anything on Wednesday and they’re going to leave the door open,” he said.
Much of the downward move in stocks was spurred by Fed chair Jerome Powell’s insistence that rates are going to remain elevated for longer than markets were expecting. Treasury yields shot higher in response, with investors shedding the bonds and delivering a historic crash to rival some of the biggest in history.
But now, Siegel says, yields are approaching their peak.
“I think we’re pretty near the top of the 10-year, maybe five and a quarter,” he said, referring to a potential ceiling on the 10-year Treasury of 5.25%. That’s nowhere near where yields were in the 1980s, he noted, adding, “that’s the only time we ever saw something like single-digit [price-to-earnings] ratios.”
The S&P 500 is up 7.7% year-to-date, and up about 16% since its low in October 2022. While valuations of the so-called “Magnificent Seven,” look high, Siegel noted that valuations are at historic lows in the rest of the market.
Meanwhile, S&P 500 (^GSPC) futures were down 0.3% in the wake of the benchmark’s lowest close since May. Dow Jones Industrial Average (^DJI) futures traded flat.
Earnings are in the drivers seat for stocks, as investors punish megacaps whose third-quarter reports turned out more downbeat than hoped. Concerns are growing that valuations are too high in a world of surging Treasury yields, as the benchmark 10-year yield (^TNX) climbed back near 5% on Thursday.
While Meta’s (META) earnings beat on the top and bottom lines, its shares reversed initial gains after the Facebook parent warned geopolitical unrest could drag on its ad business. The flow of earnings resumes Thursday, with Amazon (AMZN), Intel (INTC), Ford (F) and Chipotle (CMG) the highlights on the docket.
“There’s real dispersion,” BlackRock’s Global CIO Rick Rieder said, noting Microsoft and Alphabet earnings. “We’re getting a series of conflicting signs around market. That’s why markets are so jumpy, so uncertain.”
In one positive development, Thursday’s third-quarter GDP reading came in hot with the US economy growing at its fastest pace in nearly two years.
The strong data comes despite the Federal Reserve’s higher for longer interest rate mantra, which has failed to constrain the American consumer. The Fed’s next interest rate decision is scheduled for Nov. 1
Other central banks are beginning to shift their monetary policy. On Thursday, the European Central Bank held interest rates steady for the first time in over a year following ten consecutive rate increases.
The ECB said it would hold its deposit rate at a record high 4%. The bank maintained its previous guidance of steady policy moving forward.
A
GDP: US economy grows 4.9% amid strong consumer spending
The US economy grew at its fastest pace in nearly two years during the past three months as consumers stepped up their spending despite a high interest rate environment.
The Bureau of Economic Analysis’s advance estimate of third quarter US gross domestic product (GDP) showed the economy grew at an annualized pace of 4.9% during the period, faster than consensus forecasts. Economists surveyed by Bloomberg estimated the US economy grew at an annualized pace of 4.5% during the period.
The reading came in higher than second quarter GDP, which was revised down to 2.1%.
The GDP release highlights the resilience of the US consumer despite ongoing concerns of a slowdown. But many economists see this as the high water mark for economic growth before the credit tightening induced by the Federal Reserve’s interest rate hikes and the recent rise in bond yields grabs hold of business development and consumer spending.
Wall Street stocks were on track Thursday to add to the previous day’s sharp losses, as investors looked ahead to fresh earnings releases.
Futures on the Dow Jones Industrial Average (^DJI) were down 0.41%, or 136 points, while S&P 500 (^GSPC) futures shed 0.67%. Contracts on the tech-heavy Nasdaq 100 (^NDX) were 0.95% lower.
Stocks closed mostly higher to kick off October as a sharp selloff in longer-dated U.S. government debt resumed. The Dow Jones Industrial Average DJIA, -0.22%
fell about 74 points, or 0.2%, ending near 33,433, according to preliminary FactSet data. The S&P 500 index SPX, +0.01%
ended flat at 4,288, while the Nasdaq Composite Index COMP, +0.67%
gained 0.7%. Surging long-term borrowing costs remain a key focus in the final quarter of 2023, with the fear being they could derail the U.S. economy and spark more corporate defaults. The benchmark 10-year Treasury yield was punching higher to about 4.682% on Monday. Evidence of the debt rout could be found in the popular iShares 20+Year Treasury Bond ETF, TLT, -1.98%
which cemented its lowest close since since August 2007 and in the iShares Core U.S. Aggregate Bond ETF, AGG, -0.70%
which finished at its lowest since October 2008, according to Dow Jones Market Data. Investors in short U.S. government T-bills, however, have been mostly insulated from recent volatility, with yields steady in the 5.5% range, according to TradeWeb data.
iThe inversion in the yield curve in the corporate bond market seems to be getting entrenched due to issuers’ preference for raising resources via 3-5 year bonds and investors’ yen for high-yielding long-term bonds with maturity of 10 years and above.
The corporate bond market has been moving in tandem with the Government Securities (G-Sec) market, with a yield curve inversion emerging over the last couple of months. This is mostly due to a supply-demand mismatch.
Normally, longer-duration interest rates are higher than short-duration ones. So, the yield curve normally slopes upward as duration increases. If short-duration interest rates are higher than longer-duration rates, a yield curve inversion happens.
“Most of the corporate bond supply has been in the 3-5 year bucket. Bond supply in the 10-year bucket is scarce. Insurance companies and provident funds always want to buy bonds with maturities of 10 years and above. So, this has resulted in an inversion in the corporate bond yield curve, in line with G-Secs and State Development Loans,” said Aditya Gore, Head: International coverage and research, Fixed Income, Nuvama Wealth Management.
He observed that a couple of weeks ago, a leading non-banking finance company issued five-year bonds at 7.73 per cent and 10-year bonds at 7.68 per cent. So the yield curve is already inverted.
Today, a leading standalone housing finance company issued 10-year bonds at 7.75 per cent. But its 2026 bonds are trading at around 7.85 per cent, Gore said.
Normalisation soon
“Once the RBI hints about rate cuts, the inversion in the yield curve should start getting corrected. In another couple of quarters, the normalisation of the curve should happen. Till then, the yield curve will be flat to inverted,” he added.
In developed markets, an inversion in the yield curve implies an oncoming recession. In India, supply-demand dynamics generally determine the trajectory of the yield curve. So, the inversion in the yield curve is not a leading economic indicator.
Pankaj Pathak, Fund Manager, Fixed Income, Quantum Mutual Fund, observed that declining inflation, peaked policy rates, and a comfortable external position are all strong backdrops supporting the bond market over the medium term.
However, the near-term outlook is clouded by uncertainty over the timing, quantity, and distribution of rainfall amid forecasts of El Nino conditions.
“Given that bond yields have come down significantly over the last three months, there is a high possibility of yields moving higher from current levels in the near term.
“However, the upside on yields should be limited to 10–20 basis points given the overall macro backdrop being favorable,” he said.
