U.S. stocks surged to new records Tuesday, with the S&P 500 closing at 7,230, even as a selloff in government bonds pushed Treasury yields toward levels that threaten to undermine the rally.
“The wildcard is the ability of risk assets to retain current lofty valuations with persistently elevated Treasury yields,” Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, wrote in a note. “Prior episodes indicate that 10-year rates >4.50% and 30s >5.00% are likely to at least bring yields into conversations in other markets, if not be responsible for a bearish repricing.”
The tech-heavy Nasdaq Composite jumped 1% to a new high, while the S&P 500 added 0.8%. The advance was led by the Information Technology and Materials sectors, which gained 1.9% and 1.8%, respectively. Shares of Intel Corp. surged 13% following a report of preliminary talks to supply chips to Apple Inc., which itself rose 2.5%.
The gains in equities come as the bond market flashes warning signs. The 10-year Treasury yield climbed to 4.444%, nearing what traders see as a critical 4.5% threshold, while the 30-year bond yield breached 5.0% for the first time since last July. “These are key levels of overhead resistance [in yields], which if broken can cause a deeper sell off in bonds,” wrote Roth Chief Market Technician JC O’Hara.
Valuation Under Pressure
The divergence between stocks and bonds puts a spotlight on equity valuations, which have become stretched. The S&P 500 is trading at 21 times forward earnings, significantly above its 10-year average of 19.3, according to FactSet data. As yields on safe-haven government bonds rise, they offer an increasingly attractive alternative to stocks, potentially pulling capital away from the equity market.
The rally has been heavily concentrated in a handful of large technology stocks, with the ‘Magnificent Seven’ accounting for 36.5% of the S&P 500’s total market capitalization. While first-quarter earnings growth is on track to be the highest in four years, the market’s ability to sustain its upward momentum may depend on whether bond yields stabilize.
Elsewhere in markets, West Texas Intermediate crude oil futures fell more than 3% to $102.60 a barrel as the U.S. and Iran maintained a fragile ceasefire. The U.S. Dollar Index was little changed at 98.50.
This article is for informational purposes only and does not constitute investment advice.