The 10-year yield’s increase has crossed the crucial 4.5% threshold, which has previously coincided with significant market declines. Wilson highlights that bond yields and equity returns are now negatively correlated, a trend not seen since last summer. Despite strong economic data, it’s rising rates—not growth—that are pushing yields higher.
Higher rates particularly hurt speculative areas like small-cap stocks, where companies may face higher borrowing costs. This has contributed to the dominance of big tech in the market.
Wilson suggests staying focused on high-quality companies with strong balance sheets, which are less sensitive to rate changes.
Rising rates often lead to a stronger dollar, which recently hit a two-year high, further pressuring stocks with significant foreign sales. Companies with less than half of their revenue from the U.S. have shown much stronger earnings growth compared to those with more domestic revenue.
The key challenge for investors is finding a solution to the high rates. Economists believes weaker economic data could push rates lower and raise hopes of a Fed rate cut in 2025. However, the economic data would need to soften just enough, without causing a major slowdown. The labor market has already cooled, and further weakening is not something the Fed wants.
Ultimately, it’s uncertain whether lower rates are the answer for stock market gains. We’ll get more clarity on Friday with the release of the December jobs report.
