Mumbai, October 4 (Daily Kiran) : Global brokerage firm Jefferies has reported that the U.S. stock market has remained resilient despite rising bond yields and geopolitical tensions. Chris Wood, the firm’s global equity strategist, attributes this strength to robust corporate earnings and a surge in investments related to artificial intelligence (AI). However, he cautions that risks are increasing for equity markets as bond yields reach levels that could pressure stock valuations.
In his weekly newsletter, “Greed and Fear,” Wood highlighted that the recent uptick in U.S. Treasury yields has become a significant risk point for stock markets. The yield on the 10-year U.S. government bond has climbed to 5.34%, while the 30-year bond yield has reached 5.69%, marking the highest levels since 2002.
The impact of rising global bond yields is also evident in Indian markets, which have closed lower for eight consecutive weeks. The increase in U.S. yields has been a major factor contributing to investor caution in India.
Wood noted that historically, U.S. stock markets often experience weakness before mid-term elections, followed by a recovery. However, this pattern has not been clearly observed this time, largely due to companies reporting better-than-expected earnings.
A significant factor behind the strength in corporate earnings is the current cycle of capital expenditure driven by AI. Technology firms are investing heavily in AI infrastructure, bolstering their revenues and profits. This investment trend has helped maintain the U.S. stock market’s relative strength despite high interest rates and global uncertainties.
Yet, the pressing question for investors is how long the AI investment cycle will continue. Wood believes that the biggest concern is whether companies will achieve sufficient returns from their substantial AI investments.
He also pointed out another major concern: the G7 countries’ government bond markets are in a structural downturn. Persistently high bond yields could tighten global financial conditions further.
As returns on bonds increase, fixed-income assets become more attractive to investors. This shift could diminish the appeal of equity markets, particularly if bond yields continue to rise.
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