Stock investors are getting a green light from falling Treasury yields. The rout in Treasuries that sparked the S&P 500’s recent selloff may have run its course. And that could pave the way for a year-end rally in stocks.
The relationship between stocks and bonds has been a tight one in recent months, with equities falling as Treasury yields climbed to 16-year highs. That’s because the prices of bonds move inversely to their yields. So when bond demand surges, yields decline, and bond prices rise. And vice versa.
Investors are also drawn to Treasuries amid uncertainty over how the mid-east conflict between Israel and Hamas will escalate, as well as concerns about a slowing economy. The latter, in particular, would make it more difficult for the Federal Reserve to raise interest rates as it tries to combat inflation without knocking the economy into recession.
The Fed’s two-day July meeting kicks off on Tuesday, and traders are betting almost a 100% chance of the central bank holding rates steady after a break in June. But the upcoming meeting comes with a new set of data and events that could shape investors’ expectations for future policy moves.
On Wednesday, investors will get the latest reading on the U.S. jobs market, a key indicator of economic health and a potential catalyst for interest rate decisions. The unemployment rate is expected to tick slightly to 5.4 percent, and the number of people working or seeking work will be unchanged.
Robust profit reports have also fueled the stock rally, with big-name companies reporting this week. Generac, the maker of backup generators, reported stronger-than-forecast earnings that sent its stock up nearly 28% for its best week since its debut in 2010. Expedia Group’s report also helped push the travel company’s shares up around 21%. Then, there are the mega-cap tech stocks, whose results have been the main driver of this rally. Shares of Microsoft and Alphabet are both up more than 27% year-to-date.
Earnings season continues this week with reports from Coca-Cola, Visa, and Meta. Analysts expect second-quarter profits from S&P 500 companies to drop about 5% from the year-earlier period. But if companies beat forecasts, that might give the market reason to think that the yield rout has run its course. Then, the focus might shift to whether economic headwinds are growing too severe for monetary policy to do much about them. That could send the S&P 500 back down, though it’s not priced for a recession now. That’s a view shared by most investors we spoke to.
