Rising Treasury yields may challenge a surge that has made U.S. equities more expensive and reached record highs.
Despite Treasury yields rising in recent weeks, the S&P 500 (.SPX), gained 10% in the first quarter on expectations that the Federal Reserve will decrease interest rates this year.
According to LSEG Datastream, the benchmark index is selling at little over 21 times projected earnings forecasts, its highest since January 2022.
Strong economic data is reducing central bank rate drop predictions this year. Tuesday saw the 10-year yield, which swings against bond prices, reach 4.4%, its highest level in four months.
Stocks have mostly ignored rising yields this year because to a strong economy, strong corporate earnings, and AI hype. However, investors worry that high valuations could make equities more vulnerable if rates rise. Higher yields can make "risk-free" Treasury bonds more appealing than equities and raise company and consumer capital costs.
"The fact that (yields) are breaking above a previous ceiling here is giving pause," said Horizon Investment Services CEO Chuck Carlson. "The trend of these rates is disconcerting because you have this continued series of higher highs here that is being perpetuated today."
The stock market has been upended multiple times by rising yields. In September and October, stocks fell when the 10-year yield reached a 16-year high of slightly above 5%, but then rose again when yields fell.
The S&P 500 fell 19% in 2022 as the Fed swiftly hiked rates to curb inflation. The 10-year yield was 4.35% and the S&P 500 lost 0.7% on Tuesday. Tesla's stock was a major drag on the S&P 500 and Nasdaq on Tuesday.
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