The 10-year US Treasury bond yield has climbed above 5.25%, and the S&P 500 hasn’t flinched. The stock index is just 2.2% below our year-end target of 7,900. It could overshoot our target in the coming days now that crude oil shipments from the Persian Gulf producers reportedly are averaging around 98% of pre-war totals, excluding Iran. Producers and shippers have found workarounds to their usual Strait of Hormuz routes, including alternative pipeline routes, ship-to-ship transfers, and naval-escorted night transits.
The question is: How long stocks can ignore bonds if yields keep rising despite lower oil prices? If yields are simply repricing to reflect stronger-than-expected economic growth, then earnings will remain strong. The downside risk is to the stock market's valuation multiple if bond yields are rising on concerns about mounting government debt, possibly exacerbated by the unwinding of the yen carry trade.
For now, we are sticking with our S&P 500 targets of 7,900 by year-end and 8,400 by mid-year 2027. Here's more:
I. Bonds
The 10-year Treasury yield rose to 5.24% on Friday, and the 10-year TIPS yield rose to 2.91% (chart). Since the start of the year, the nominal yield is up 109bps, and the TIPS yield is up 95bps. Real yields account for nearly all of the increase, while inflation expectations have barely budged. We read that as a vote of confidence in the economy and a sign of strong demand for credit.
