From Kiplinger · · 2m
Stocks struggle as inflation and rates squeeze valuations
Rising Treasury yields and persistent inflation pressures are making stocks less attractive relative to bonds, forcing investors to reassess risk.
In brief
Rising Treasury yields and persistent inflation pressures are making stocks less attractive relative to bonds, forcing investors to reassess risk. With 10-year Treasury yields near 5.1% and stock earnings yields barely higher, investors are getting little compensation for taking equity risk in a strong but…
Markets open lower amid bond selloff
All three major indexes opened down as the bond market continued selling. The Nasdaq ended nearly flat at 26,939, while the S&P 500 fell 0.02% to 7,704 and the Dow dropped 0.3% to 51,350.
Fed signals another rate hike coming
New York Federal Reserve President John Williams said another 25 basis point rate increase is likely by year end, following the Fed's first hike in three years in September.
“It's likely that another rate hike may be appropriate by the end of the year.”
Labor market shows continued stability
Weekly jobless claims fell from 198,000 to 197,000, indicating the labor market remains steady despite broader economic pressures.
Strong economy fuels inflation concerns
Economic activity is accelerating sharply with manufacturing and services at multiyear highs. The bond market interpreted this strong data as a sign of persistent inflation and higher rate risks ahead.
“The economy is accelerating sharply.”
Treasury yields hit 17-year highs
The 10-year Treasury yield broke above 5.1% for the first time since 2007, while the 30-year yield hit its highest level since 2004 at 5.489%.
Stocks offer little advantage over bonds
With the S&P 500 earnings yield around 5.15% and the 10-year Treasury near 5.10%, stocks are offering almost no compensation for the extra risk investors take by owning equities.
“Stocks are offering almost no earnings-yield advantage over Treasuries.”
Mortgage rates climb above 7 percent
The average 30-year fixed-rate mortgage reached 7.03% this week, up from 6.95% last week and 6.3% a year ago. It's the first time above 7% since January 2025.
Oracle invokes force majeure on data center
Oracle fell 7.7% after invoking a force majeure clause on its 165 billion dollar, 2.45-gigawatt Project Jupiter data center in New Mexico to protect itself from cost overruns.
Project Jupiter faces significant delays
The data center project is proceeding amid regulatory, legal and logistical setbacks. Oracle is attempting to defer payments if the project fails to come online by its 2028 deadline.
MGM stays public after deal collapses
People withdrew its offer to take MGM Resorts private, citing concerns about the debt load the deal would create. MGM stock fell 11% on the news.
“We didn't feel the mix was coming together in the way we had hoped.”
Here's the gist
With 10-year Treasury yields near 5.1% and stock earnings yields barely higher, investors are getting little compensation for taking equity risk in a strong but inflationary economy.
