Mumbai, Oct 4 (IANS) US equities have so far remained resilient despite rising bond yields and heightened geopolitical tensions, supported by strong corporate earnings and the investment boom linked to artificial intelligence, Jefferies Global Equity Strategist Chris Wood said.
However, he warned that risks to equities are increasing as government bond yields climb to levels that could put greater pressure on valuations, particularly with the US Federal Reserve adopting a more hawkish stance.
In his newsletter Greed & Fear, Wood said the latest rise in US Treasury yields marks an important risk point for equity markets. The yield on the benchmark 10-year US government bond rose to 5.34 per cent, while the 30-year yield touched 5.69 per cent, with both reaching their highest levels since 2002.
The surge in global bond yields has also added to pressure on Indian equities. The Indian stock market recorded its eighth consecutive weekly decline through Friday, with rising US yields emerging as one of the factors weighing on investor sentiment.
Wood noted that US equities have historically tended to underperform in the period leading up to mid-term elections before staging a recovery afterwards. However, that historical pattern has not been evident so far this year, largely because of exceptionally strong earnings growth.
According to Wood, the earnings momentum has been driven in significant part by the highly earnings-accretive AI capital expenditure cycle. Heavy investment by technology companies in artificial intelligence infrastructure has supported corporate profits and helped US stocks withstand pressures from higher interest rates and geopolitical uncertainty.
The sustainability of the AI investment cycle, however, is now emerging as a key question for investors. Wood said the biggest concern for equities is how long the current AI capital expenditure boom can continue and whether companies will generate sufficient returns from the enormous sums being committed to the technology.
A second concern is the growing recognition that government bonds across the G7 economies remain in a structural bear market. Persistently elevated yields could tighten financial conditions and make equities less attractive relative to fixed-income assets, particularly if bond yields continue to rise.
–IANS
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