(Bloomberg) -- After a week when inflation fears revived, bond yields jumped and US presidential politics stewed, the biggest takeaway for risk-asset bulls may be how little any of it ended up bothering them.
True, a selloff in Treasuries pushed US 10-year yields to the highest since July, revving up anxiety across Wall Street and formally ending a six-week advance in the S&P 500 that had been the longest since December. Volatility indexes, particularly in fixed income, climbed, another sign that months of near-historic calm are under threat.
And yet, there was little evidence of panic. Ahead of a watershed week of tech earnings, the Nasdaq 100 pushed within 2% of its all-time high. Commodities surged, while junk bonds bounced back after three days of selling. Money flowed into investment-grade credit and equity exchange-traded funds — albeit at a slowed pace — while active bond fund managers have been showered with cash.
To bears eyeing the ever-expanding economy and its implications for central bank policy, it all rings of complacency — especially if Jerome Powell’s Federal Reserve is forced to halt or slow monetary easing to keep price pressures at bay. Among investors at large, however, the week was another show of fortitude in a year when almost $10 trillion of fresh shareholder wealth has already been created.
“The key drivers of equity returns now are still abundant liquidity, policy easing and OK economic and earnings growth,” said Marija Veitmane, senior multi-asset strategist at State Street. “We do not think that rising bond yields are necessarily detrimental for the equity rally.”
To be sure, markets are no longer the pools of serenity they were through much of August and September. Turbulence is getting pronounced in Treasuries, with the ICE BofA MOVE Index of volatility extending its biggest net monthly jump since the onset of the pandemic. The S&P 500 lost nearly 1% over the five days.
Virtually every market has seen a significant uptick in hedging, as indicated by big gaps between implied and realized volatility in the Treasury and equity markets. Stock pickers are trimming positions: an indicator of exposure kept by the National Association of Active Investment Managers posted its first back-to-back retreat since August. Investors sent money to cash funds at the fastest pace in four weeks, according to a Bank of America note citing EPFR Global data.
Even with the turmoil, though, the Nasdaq 100 ended the week 0.1% higher, helped by a 22% rally in Tesla Inc. after earnings topped predictions.
Big-picture data has proved strong, with jobless claims, durable goods orders and a report on consumer sentiment all pointing to a resilient economy. Citigroup measure of economic data beats has improved for three months and is back to the highest levels since April.
“Are there risks? Sure, there’s always that wall of worry,” said Garrett Melson, a portfolio strategist at Natixis Investment Managers Solutions. “Yields are pushing higher. But that’s being largely driven by higher real yields — that means stronger growth expectations, and that’s supportive of higher earnings estimates.”
Buoyant economic data remains the best explanation for the runup in Treasury rates, which this week saw 10-year yields rise about 15 basis points to top 4.20%, and is the basis for bullishness in other assets. Alongside it, however, has been rising nervousness about price pressures. Gauges of inflation expectations derived from inflation-protected Treasuries — so-called five-year breakeven rates — jumped to 2.3% on the week, the highest level since June.
Election uncertainty continues to cloud the risk picture and is considered by some to be a factor in the yield increase, on grounds Donald Trump’s promised tariffs and fiscal spending will spur inflation.
Rising rates are also a factor for those worried about stretched valuations in the equity market. An indicator loosely known as the Fed model, which plots relative income levels in stocks and bonds respectively, shows equities are as richly priced as any time since 2002. With government bonds selling off, the 10-year Treasury yield rose about half a point above the so-called earnings yield of the S&P 500.
“The US economic outlook has once again improved, giving the economy enough momentum to push through any pre-election uncertainty,” said Lauren Goodwin, economist and chief market strategist at New York Life Investments. “That’s not to say that there aren’t any areas of weakness.”
Earnings themselves are less of a problem. So far, about two-thirds of the companies that have reported profits have topped estimates, according to Bloomberg Intelligence. Wall Street analysts continue to predict gains of 14% for 2025 and 12% for 2026 among S&P 500 companies.
“The simple answer is earnings — estimates for both current quarter and subsequent quarters imply healthy growth,” said Jake Schurmeier, portfolio manager at Harbor Capital Advisors. “So long as that continues, it’s too costly to focus on all of the things that could go wrong.”
