Investors tiptoe back to U.S. stocks amid ebbing treasury yields

After enduring a protracted spell of uncertainty, investors are cautiously tiptoeing back into the U.S. stock market, buoyed by diminishing Treasury yields and signals of a more lenient stance from the Federal Reserve. The recent seesaw in market dynamics, marked by the inverse relationship between stocks and bonds, has taken an intriguing turn, prompting a surge in the S&P 500, and fostering guarded optimism among market participants.

The compelling catalysts behind this cautious resurgence include news of smaller-than-expected U.S. government borrowing and indications that the Federal Reserve is approaching the conclusion of its rate hiking cycle. Yields on the benchmark 10-year US Treasury, which had scaled to 16-year highs in October, have receded by approximately 35 basis points, offering a glimmer of hope to wary investors. In tandem, the S&P 500 saw a 5.9% climb last week, recording its biggest gain since November 2022. Although the index remains 5% below its July peak, it has surged by an impressive 14% year-to-date.

Contrarian investors have found solace in the current climate, with exposure to equities among active money managers at its lowest level since October 2022, according to the National Association of Active Investment Managers. Additionally, Deutsche Bank reported a notable dip in aggregate equity positioning, fueling a potent market rebound as investors re-entered the fray.

Historical trends also lend weight to the cautious optimism prevalent in the market. The last two months of the year have historically favoured stocks, seeing an average S&P 500 rise of 3%. Moreover, the index’s best-performing period, averaging a 2.2% increase, commenced on October 22, underscoring the potential for further gains in the coming weeks.

While positive factors bolster market sentiment, challenges persist. Technology giant Apple recently delivered a lacklustre holiday sales forecast, triggering a wave of price target reductions by analysts. Such uncertainties underscore the fragile nature of the current market rally.

Analysts, however, remain hopeful, citing expectations of 5.7% earnings growth for S&P 500 companies in the third quarter. Over 81% of the 403 companies in the benchmark index that have reported profits thus far have surpassed estimates, according to LSEG data.

However, concerns linger and some are not so optimistic. Greg Wilensky, Head of U.S. Fixed Income at Janus Henderson Investors, warns that the ‘good’ moderation seen in the economy may eventually give rise to debates about weakening economic and labor market conditions, potentially fueling recession anxieties.