'Good buying opportunity': what top financiers advise amid bond collapse

Strategists warn that U.S. stocks have not yet taken into account the risk of a sharp acceleration in inflation and remain vulnerable to a jump in bond yields. The bond sell-off that swept through global markets on Friday continued on Monday, Ma. 18, with 10-year Treasuries yields rising above 4.6% at one point and 30-year yields remaining above 5.1%.

The growth of yields is associated with the rise in energy prices amid the prolongation of the war with Iran: investors fear that inflationary pressure will force the Fed and other global central banks to raise interest rates.

The S&P 500 retreated from an all-time high on Friday. Stock index futures indicate it will continue to decline on Monday. Here's what Wall Street financiers are warning about and advising you to do.

The stock market is facing a significant drawdown due to the global sell-off in bonds, warned Morgan Stanley strategists led by Mike Wilson, their note quotes Bloomberg. If volatility in the debt market intensifies and long-term bond yields continue to rise, analysts at the investment bank expect "the first meaningful pullback in stock prices since they bottomed out in late March." According to Wilson, bonds need a sustainable resolution to the conflict with Iran to recover.

At the same time, strategists maintained their long-term optimistic forecast for the S&P 500 index: they still expect its growth to 8300 points on a 12-month horizon, that is, by 12% relative to the closing on Ma. 15. "Bullish" mood Wilson explains the strongest rate of growth in profits of U.S. companies for more than two decades. However, market participants are not yet ready to build risk across the board, he says. "The key factors to watch for, and which could accelerate the expansion of market growth beyond AI beneficiaries, are lower oil prices and bond yields."

If 10-year U.S. Treasury bond yields continue to rise, they will likely peak in the 4.75% to 5% range in the coming weeks, predicts Ed Yardeni, president and founder of Yardeni Research. This, he believes, will be a good buying opportunity for both bonds and stocks, MarketWatch reports.

Yardeni also confirmed his expectations for the growth of the S&P 500: the index should rise to 8250 points by the end of the year. However, the strategist admits that the stock market "could reach a local peak".

The bond market fears that the next Fed chief, Kevin Warsh, who is due to take office any day now, will take too long to put up with high inflation instead of promptly raising rates, Yardeni explains. "He will probably have to capitulate and join the proponents of policy tightening sooner rather than later," the strategist believes. - Bond vigilantes will force him to reverse course." The head of Yardeni did not rule out a rate hike as early as June.

TwinFocus co-founder and managing partner Paul Karger, whose firm manages wealth for ultra-wealthy families, told Reuters that clients were literally flooding him with questions about how to explain the current market paradox. "I get asked at breakfast, lunch and dinner how to reconcile such a contradictory picture: on the one hand, corporate reporting remains strong, while on the other hand, rising oil prices and inflation are becoming a negative for business," he said.

Karger follows what's known as a barbell strategy: betting heavily on cash, gold and commodities at the same time, while maintaining positions in the largest market-leading growth stocks.

Rising yields typically put pressure on stock valuations as the cost of borrowing for companies and consumers increases. This can slow economic growth and hit corporate profits and make bonds a more attractive alternative to stocks, Reuters explains.

This is especially true now that the stock market is at high levels. According to LSEG Datastream data cited by the agency, before Friday's pullback, the S&P 500 was trading at a P/E multiple of 21.3 - with a long-term average valuation of 16.

According to John Higgins, chief economic adviser at Capital Economics, the Treasury bond market is already pricing in a prolonged closure of the Strait of Hormuz, while the stock market has not yet factored in that risk.

"Traders don't want to turn bearish as long as it remains possible - and many believe it - that the situation around the Strait of Hormuz could be resolved in just a few weeks," strategist T. Rowe Price Tim Murray.

This article was AI-translated and verified by a human editor