The chief investment officer at Morgan Stanley warns that the stock market looks primed for a corrective move as long-term interest rates in the bond market soar.
The News
In a new investor note, Mike Wilson says long-dated US Treasury yields are on the up and up, fueled by inflation fears amid rising energy prices, Bloomberg reports.
With the 30-year Treasury bond yield soaring to 5.19% on Wednesday, the highest level in three years, Wilson says a market retracement is now within the realm of possibility.
“We would expect the first meaningful correction in equity prices since markets bottomed at the end of March.”
According to Wilson, investors need to see a long-term resolution in the Middle East before Treasury yields decline, which would subsequently enable the stock market to trigger a new leg up.
“While a widespread earnings recovery is gaining momentum, market participants are generally not positioned for it. The key variables to watch that should accelerate this broadening trade are oil prices and rates coming off recent highs.”
What It Means for Investors
In April, investor Steve Eisman told investors to keep a close watch on the US 10-year yield, noting that when the 10-year spikes to 4.5%, the market tends to sell off.
At time of publishing, the 10-year rate is hovering at 4.58%.
Historically, equities tend to correct when bond yields soar because investors often dump their stocks in favor of the safer and less volatile US Treasuries, particularly in times of geopolitical stress. Higher bond yields mean investors can make more money without worrying about an abrupt or sharp correction. Additionally, Treasuries are backed by the US government and are widely considered the safest form of investment.
While Wilson appears to be short-term bearish on stocks as long-dated yields climb, he is still long-term bullish as he sees widespread earnings recovery gaining momentum.
In a new episode of the bank’s Thoughts on the Market podcast, Wilson said that he expects the S&P 500 to soar to 8,300 in 12 months, driven by higher earnings estimates. According to the Morgan Stanley executive, companies in the S&P 500 are in a rolling recovery boosted by the massive AI CapEx cycle, fiscal support from the Trump administration via stimulus and deregulation and AI adoption.
For now, Wilson says investors should keep a close eye on the price of oil, as it is the catalyst for higher Treasury rates.
It seems that more experts and analysts are sounding the alarm over higher oil prices. The S&P 500 has rallied from its March 30th lows at a frenetic rate, with a prevailing sentiment that the conflict in Iran will soon be resolved. But with the bond market flashing warning signs, investors may need to take a closer look at macro data rather than follow the herd.
The market never goes up in a straight line, and higher-for-longer oil prices have historically been a bearish catalyst for the stock market.
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