(Bloomberg) — Wall Street’s happy-go-lucky mood after Republican Donald Trump’s victory in the presidential election is propelling US stocks to record highs in their best session since the summer.
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But a familiar foe is threatening to put a damper on this risk-on vibe: soaring bond yields.
Investors are dialing back wagers on how aggressively the Federal Reserve will cut interest rates after economists warned that Trump’s policy proposals — from deregulation to tax cuts — could balloon the deficit and reignite inflation. Treasuries are already reacting, with yields on the 2-, 5-, 10-year and 30-year notes jumping to the highest since July.
Leading up to Election Day, Wall Street strategists emphasized that bond yields would set the trajectory for US equities, contending that if rates move higher equities could pull back.
“The Red Sweep narrative is clearly driving up market expectations for nominal growth, which is bullish for earnings but also puts upward pressure on yields,” said Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors LLC. “This sets up a tug-of-war between earnings and rates.”
Traders should get a bit more clarity on the path from here after the Fed’s interest-rate decision on Thursday followed by Chair Jerome Powell’s press conference.
Record Day
For now, however, equity investors seem unfazed. The S&P 500 Index, Nasdaq 100 Index and Dow Jones Industrial Average all set new intraday highs Wednesday. And the small-cap Russell 2000 Index, which houses some of the riskiest stocks in the market, jumped more than 5% for its best day in a year, inching closer to its first record since 2021.
“I am not surprised that for the moment, equities are ignoring the spike in interest rates, perhaps believing that deregulation and the potential for lower corporate tax rates is a bigger deal,” said Michael Kantrowitz, chief investment strategist at Piper Sandler & Co.
That said, not everyone in the stock market is celebrating. Of the S&P 500’s 11 major sectors, three are in the red, with real estate falling around 3.2% as rising interest rates mean higher mortgage rates. And although the index is up 2.4%, more than 160 of its stocks are down. At the New York Stock Exchange, 36% of the stocks were trading lower as of 1:15 p.m. in New York.
“Stocks, currencies, and commodities are all following the playbook from 2016, but 2024 is not 2016,” said Marko Papic, chief strategist at BCA Research. “In 2016, stocks needed more growth and inflation. It is not clear that’s what we need today in a world of elevated bond yields. So I do believe rising yields will negatively impact stocks.”
