"Sentiment Is Too Optimistic": BofA Weighs In on the Competition Between Bonds and Stocks

For the first time in decades, stocks are facing real competition from bonds, said Savita Subramanian of Bank of America. In her view, overoptimistic investor sentiment makes stocks more vulnerable to disappointment rather than promising them growth, according to Bloomberg.

The risk-adjusted return on 10-year U.S. Treasury bonds currently exceeds 5%, Subramanian noted. However, her team’s proprietary valuation model suggests that the S&P 500’s return over the next 10 years may not reach that level.

“For the first time in decades, bonds are looking attractive again,” Subramanian said in an interview with Bloomberg. According to her, U.S. regulators are focused on ensuring that long-term bond yields do not rise too high, with both the Federal Reserve and the Treasury paying close attention to the long end of the yield curve. Demographic trends also suggest that peak interest rates may be lower than they were in the 1970s and 1980s, while advances in artificial intelligence could help keep inflation in check over time, she added.

According to Subramanian, this creates potentially more attractive conditions for bonds, as yields are unlikely to rise significantly above 6–7%. Although such levels would be high, stocks should nevertheless be able to cope with them, the expert noted.

The stock market has so far successfully weathered rising yields, Bloomberg notes. On Tuesday, October 6, the S&P 500 closed at a record high for the first time since August, thanks to strong corporate earnings and the prospects for AI investments. Savita Subramanian views this investor optimism as a potential cause for concern, noting that analysts are forecasting record earnings growth for S&P 500 companies over the next five years. “When expectations are this high, the market is more likely to be disappointed than to be pleasantly surprised. This isn’t the tech bubble of 2000, but I fear that sentiment has become too optimistic,” she said.

Yields on 30-year U.S. Treasury bonds rose during U.S. trading on October 7 to 5.73%, while yields on 10-year bonds rose to 5.36%, marking a high not seen since 2002. This isn’t the first time bonds have reached this level, but they returned to it after a slight pullback. Yields rise when bond prices fall.

A significant sell-off in bonds in recent months has been fueled by a sharp revision in expectations regarding interest rate hikes in the U.S. aimed at curbing energy-driven inflation, according to Bloomberg.

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