Rising yields are just one of a deadly trio of threats to corporate profits, experts warn.
Investors will be watching S&P 500 companies’ earnings calls to hear how companies are going to handle three pressures: rising yields, increasing wage pressures and tariffs, CNBC.com reported.
Although stock prices usually climb along with higher rates, government bonds’ yield spike may actually foreshadow a tumble, CNBC.com explained.
"The 3Q earnings season that begins next week will continue the pattern of stellar results that companies reported during 1Q and 2Q 2018," David Kostin, Goldman's chief U.S. equity strategist, said in a note.
"Recent economic data releases have been extremely strong but the current positive fundamental news also introduces risks for 2019," he was quoted by CNBC as writing.
To be sure, Bloomberg explained that a recent Goldman study found that over the last 50 years, share prices have tended to decline when yields rise sharply over a month, with a threshold of stress sitting at about 40 basis points earlier this year. That’s roughly what happened in the month through Feb. 1, before the selloff that sent the S&P 500 to its first 10 percent correction in two years.
The firm updated its assessment in May and said a one-month surge in rates of roughly 20 basis points or more could spell trouble for stocks.
The 10-year yield crept up to a fresh seven-year high of 3.25 percent, above the S&P 500's 1.81 percent dividend yield and offering investors a viable risk-free alternative to a suddenly volatile stock market, CNBC explained.
Besides the fear of slowing global growth, Wall Street has come under recent pressure after Treasury yields hit multi-year highs as strong data fueled fears about rising inflation and potentially faster interest rate hikes.
Meanwhile, Bloomberg explains that in a stock market immune to everything from trade wars to emerging economy implosions, the yield spike was another demonstration that it remains vulnerable to signs of a crack in credit.
“Leverage is near all-time highs, and companies used tax reform proceeds for buybacks instead of paying down debt,” said Max Gokhman, head of asset allocation for Pacific Life Fund Advisors, which manages $40 billion. “More than triple the debt that came due in 2018 will be due each year from ’19-’21. If yields go up, there’s real concern about companies’ ability to reissue and keep their leverage.”
While the altitude of yields makes headlines, for the past year it’s been the suddenness of moves in Treasuries that have incited the real angst in equities. Going by this, it’s not any specific economic signal or higher borrowing cost themselves spooking bulls, but knee-jerk selling spreading from bond portfolios and fear losses will worsen.
Big moves in bonds often batter sentiment in stocks. The last five times Bank of America’s MOVE Index tracking Treasury volatility has swung 10 percent or more, the S&P 500 fell more than 1 percent on four of them. The average decline was 1.3 percent.
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