According to Alain Bokobza, the head of global asset allocation at Societe Generale, the 10-year hitting levels of 5.5% would eventually overwhelm earnings growth due to the higher borrowing costs, and thereby pressure valuations of the equity markets.
Bokobza said that equity markets have not collapsed in the wake of rising yields simply due to the heavy earnings upgrades that were received through the year courtesy of the AI rally. The US 10-year yield is at 4.8%, which is at the highest level in nearly two years, while yields across Japan, France, UK, Germany and other G7 nations are at multi-year highs.
At 5.5%, the earnings upgrades would no longer be enough to justify the valuations and that is the threshold at which equities will begin to be attacked, Bokobza added.
Bokobza is also of the view that any potential rate hike from the European Central Bank or the US Federal Reserve will see a muted reaction and will not be enough to break either the current economic cycle or allay fears of higher inflation.
A similar warning was issued by JPMorgan’s Grace Peters last week, when she said that the 10-year reaching levels of 5% will have a psychological impact and could result in a knee-jerk reaction in the equity markets.
While Peters sees further upside for both US and European equities, she said that a 5% to 8% correction remains possible in the lead-up to the mid-term elections and that would constitute a healthy pullback instead of a structural breakdown.Emmanual Cau, Barclays’ head of European Equity Strategy also said on September 3, that the monthly seasonality, the mid-term elections, rate volatility and the upcoming mega AI IPOs are building the case for investors to selectively reduce risk.
Calling the bond markets the “elephant in the room” for stocks, adding that at 5%, the investors will begin to get much more nervous about the impact on the equity markets.
