Live Markets-How bond vigilantism can hit stocks
SPY•Bond yields and equity pressure
Long-dated bond yields hit a 19-year high in the U.S. this week, with spillovers into Europe, as new Federal Reserve chair Kevin Warsh's pared-back communication style left investors worried about inflation.
Barclays strategist Emmanuel Cau says a steepening in yield curves could be a negative for equities, particularly growth stocks, implying that "earnings will need to do more of the heavy lifting going forward".
Why steeper yield curves matter
Higher longer yields and steeper curves can hurt flashy growth stocks, which sell investors a distant future. When safe money pays more today, investors will pay less for cash flows promised a decade from now.
Steeper yield curves are also just what banks, which borrow short and lend long, like to see.
Growth stocks, earnings and market leadership
Luckily that seems to be the case, as shown by the Nasdaq NQcv1 rebounding and European indices .STOXX hitting record highs today with tech stocks rallying, boosted by a jump in Amazon's shares after strong earnings.
Earnings per share growth in the second quarter is "running at the strongest pace in four years in both the U.S. and Europe, keeping headline equity indices near the highs," Cau says in a research note.
Yet he adds: "Under the hood, market internals tell a different story, with leadership rotating away from duration sensitive growth stocks, with higher for longer rates and steepening yield curves reinforcing our preference for a Value tilt and our long standing Banks overweight."
