Spike in Interest Rates Is Doing Plenty of Damage to Stocks Phil Serafino Smaller stocks, banks and utilities have been pummeled. With the S&P 500 less than 2% from a record, it sure looks like equity investors have been unfazed by this year’s sharp rise in bond yields. Under the surface, the spike is already causing plenty of damage.
Everything from small-cap stocks to banks and utilities are getting battered. And many of the most speculative corners of the market are underperforming since the Fed raised interest rates last month for the first time in three years to cool inflation. It’s a unique moment for stocks, which are being held aloft at the index level by the AI trade while at the same time staring down the type of circumstances — from mounting geopolitical risks to rising rates — that historically have led to turbulence.
Stocks can handle higher yields for now as long as the economy and profit growth hold up, said Eric Diton at The Wealth Alliance. “But the biggest risk to stocks is if something goes wrong with AI buildout,” he said. “If profit outlooks get slashed, it’ll spur wider pain across equities.” —Jess Menton France’s 2027 budget proposal unveiled yesterday has done nothing to stem the sense of crisis in the country’s bond market. The yield premium that investors demand to hold French 10-year government bonds over German bunds just keeps climbing, approaching 1.5 percentage points today. The yield on OATs has surged more than one percentage point since June, to about 4.93%.
Investors are backing off their long-held view that the country will muddle through its challenges and remain a relatively safe bet. (In Japan, one fund manager has sold his entire holdings of French government bonds, shifting to bunds and Japanese debt.)If Paris can’t get to grips with the budget situation, the danger won’t be contained within French borders. Other countries could suffer through market contagion, fiscal rule erosion and weakened leadership in a region already grappling with challenges. The euro is at a 16-month low against the dollar and hedge funds are increasing bets against the currency. —Alice Gledhill and William Horobin.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing