Forgetting yields

The S&P 500 P/E has moved up despite the increase in yields. The disconnect from rates has been one of the big conundrums in 2023. Let's look at some charts, and then some possible explanations and lastly if the reversion actually now has started.

Source: Goldman

The crocodile gap

The longer term gap between NASDAQ and the US 10 year remains huge.

Source: Refinitiv

Cyclicals de-coupled

Cyclicals rolled over even as bond yields moved higher...This is not suppossed to happen.

Source: JPM Equity strategy

Value de-coupled

Also the performance of Value has dislocated from the move up in bond yields.

Source: Goldman

Why the massive disconnect?

1 - We have passed the magic level

“4%” represents a threshold in the level of bond yields where higher rates flip from being "bad" to "good" for growth or expensive stocks. Historically, since 1990, the correlation between the direction of yields and factor performance has been weaker or even in reverse at higher levels of bond yields, such as the level we have today. Moreover, in theory, the "duration risk" for long duration (i.e. high growth) equities becomes lower at higher levels of yields.

Source: Sanford Bernstein

2 - AI is the answer...

"The outperformance of the technology sector (the Nasdaq, for example, is up 42% this year and the MSCI World up 15%) has occurred despite the impact of higher interest rates. This is very different from the experience of 2022 when higher interest rates, driven by the rise in inflation, prompted a de-rating of the technology sector owing to its 'long duration', or sensitivity to rising discount rates. The implication is that investors are assuming much higher future growth rates to offset higher discount rates."

Source: Goldman

3 - Bad news is good news now, but only up to a point

In general, equities like a falling 2Y yield when yield is above 4% -- but not in recessions.

Source: Macrobond

4- Maybe it was just one of those "glitches"?

It looks like NASDAQ finally has started to notice the latest move in rates...The connection between tech and the US 10 year has actually been strong since mid July.

Source: Refinitiv

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