A rally in big tech spurred a rebound in stocks, outweighing concerns over higher Treasury yields just a few days ahead of a speech by Federal Reserve Chair Jerome Powell.
The S&P 500 climbed, following its longest streak of weekly losses since February. The Nasdaq 100 was up about 1.5%, with Tesla halting a six-day losing run. Nvidia, which helped ignite the artificial-intelligence frenzy that has driven this year’s equity surge, jumped over 8%. As the chipmaker gets ready to report its results Wednesday, revenue is seen rising 65% from a year earlier, according to data compiled by Bloomberg.
“This is a big week for tech stocks, and optimism is brewing that Nvidia will deliver some good results,” said Ed Moya, senior market analyst for the Americas at Oanda. However, stocks are going to have “a hard time” if real yields continue to rise, he noted.
Bonds resumed their sell-off as signs of economic strength bolstered bets on still elevated rates. The yield on 10-year inflation-protected Treasuries briefly pushed over 2% for the first time since 2009. Not long after, the yield on 10-year notes without that protection hit a level last seen in late 2007.
Just because real yields have climbed, it doesn’t mean the scenario for stocks is necessarily bad, according to Bespoke Investment. Since 1997, average forward returns for equities when real yields are at 52-week highs are just modestly worse than all periods, the strategists wrote. In addition, new highs for real yields broadly tend to lead to pockets of stronger earnings-per-share growth, they noted.
“That’s consistent with the view that high real yields represent a stronger economy, even if that has some negative implications for asset price valuation,” Bespoke strategists said.
Powell will speak Friday at the Kansas City Fed’s Jackson Hole Economic Policy Symposium after officials last month lifted rates to a range of 5.25% to 5.5%, the highest level in 22 years. Minutes from the gathering showed policymakers still saw significant risks that inflation could remain higher than they expect – which could keep rates elevated.
“Traders will be sifting every sentence from Jerome Powell at this week’s Jackson Hole conference for clues about the Fed’s disposition,” said Chris Larkin, managing director of trading and investing at E*Trade from Morgan Stanley. “Some investors may have focused on the reality that this economic resilience may extend the Fed’s higher-for-longer stance on interest rates.”
In fact, two-thirds of 602 respondents in Bloomberg’s latest Markets Live Pulse survey say the Fed has yet to conquer inflation. And over 80% of those surveyed said Powell’s Jackson Hole speech will reinforce the message of a hawkish hold.
“The Fed and investors will soon pivot from a focus on how high the policy rate will go to a concern about how long they will stay at that level – and what the implications are for a ‘higher for longer’ scenario,” said Katie Nixon, chief investment officer for the Wealth Management business at Northern Trust. “In our view, Powell will want to stay on message, and will try to push back against a growing market consensus that rate cuts are on the 2024 horizon.”
The speeches from Fed chiefs at the Jackson Hole conference have typically buoyed stocks since the turn of the millennium, with the S&P 500 gaining 0.4% on average in the following week, data compiled by Bloomberg Intelligence show.
But last year’s appearance is still fresh in traders’ minds: Equities slumped 3.2% in the week following Powell’s remarks, according to BI, after he warned of keeping policy restrictive to battle inflation.
Meantime, two of Wall Street’s top strategists are at odds about the outlook for U.S. stocks following a three–week run of declines as debate rages over whether the economy can avoid a recession.
While Morgan Stanley’s Michael Wilson – a stalwart equity bear – says sentiment is likely to weaken further if investors are starting to “question the sustainability of the economic resiliency,” his counterpart at Goldman Sachs, David Kostin, says there’s room for investors to further increase exposure if the economy stays on course for a soft landing.
A bruising August is still poised to end a five-month winning streak for equities. Yet there have been few signs of outright bearishness in the recent rout.
Hedge funds and other large speculators narrowed their net-short positions in S&P 500 futures to the smallest in 14 months, according to the latest batch of Commodity Futures Trading Commission data Friday. And analysts say the drop this month may be a welcome break from the steep gains that pushed valuations to lofty levels.
