LIVE MARKETS-Wall Street's yield watch may hold key to stocks' next move

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WALL STREET'S YIELD WATCH MAY HOLD KEY TO STOCKS' NEXT MOVE

A stabilization in US Treasury yields could provide the next lift for US equities, according to JPMorgan, which argues that strong earnings momentum and a resilient economy continue to support stocks despite lingering inflation concerns and lofty valuations.

In a strategy note, the bank said the recent rise in the benchmark 10-year Treasury yield was driven largely by markets repricing expectations for Federal Reserve policy rather than a sharp deterioration in economic fundamentals.

The yield recently climbed above 5%, touching a 24-year high of 5.36% earlier this month before easing back toward 5.1%. JPMorgan said a stabilization in yields could ease pressure on equity valuations and provide further support for US stocks.

The move in yields has emerged as one of the biggest headwinds for equities, pressuring stock valuations by raising discount rates and offering investors more attractive returns in fixed income.

JPMorgan maintained a constructive view on equities, pointing to positive earnings revisions and economic indicators that continue to signal expansion. It highlighted resilient US consumer spending and global business activity data as evidence that growth remains on solid footing.

While recent US inflation readings have come in hotter than expected, JPMorgan said the underlying pace of inflation has not accelerated dramatically and remains only modestly above recent trends.

Valuations, however, remain a challenge. The bank noted that US equities trade at roughly 20 times forward earnings, which leaves less room for disappointment and appears stretched relative to real bond yields.

The bank's base-case scenario assumes economic growth remains sustainable, inflation stays under control and the Federal Reserve keeps interest rates on hold while geopolitical risks subside. Against that backdrop, equities could continue to grind higher.

The main threat to that outlook, JPMorgan said, would be a fresh acceleration in inflation that forces the Fed to resume tightening and pushes Treasury yields higher, potentially renewing pressure on stock valuations.

(Rashika Singh)

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