A potential year-end rally in the stock market may be short-lived due to equities not fully reflecting the expectation of sustained higher interest rates, warns Jean Boivin, the head of research at BlackRock Inc. Treasury yields have recently reached multi-year highs as investors brace for an extended period of tightened monetary policy by the Federal Reserve, a situation that historical data suggests could negatively affect stock prices.
Boivin, a former Bank of Canada official who now leads the BlackRock Investment Institute, poses the question of whether the surge in interest rates has already impacted equities. His answer is, “Not yet.” He believes there is more room for downward adjustment in the stock market, but he expects a more favorable environment in 2024 once this adjustment is complete.
Boivin’s team has maintained an underweight position in broad developed-market equities on a tactical basis since July 2022, despite an 11% rally in the MSCI World Index during that time. His reasoning is twofold: first, he anticipates global economic growth to stall in the coming year, with the U.S. economy appearing weaker than it seems. Second, he asserts that equities do not adequately account for the enduring high-interest rate environment.
He adds, “If it turns out that we’re wrong and there’s a substantial uptick in economic growth or a sustained decline in interest rates, that would make us more optimistic about stocks.”
Market activity in early November appears to contrast with Boivin’s expectations. The S&P 500 Index achieved its strongest weekly gain in a year, and the 10-year bond yield retreated from 5% following signs that the Federal Reserve might adopt a less stringent policy outlook. The chorus of investors and strategists anticipating a year-end rally has grown, fueled by expectations of a peak in interest rates and support from seasonal trends.
The benchmark S&P 500 remains approximately 14% higher year-to-date, with most of these gains driven by technology giants, thanks to optimism surrounding artificial intelligence.
While Boivin is also bullish about the impact of AI, he contends that the underperformance of the equal-weighted S&P 500 index, which limits the influence of the tech heavyweights, better reflects the challenging macroeconomic environment. This index has remained flat for the year.
In contrast to Boivin, Bank of America Corp. strategist Savita Subramanian noted that long-term growth expectations for the S&P 500 are near all-time lows when excluding the group of tech giants. However, she suggests that an indicator at the bank, which compiles strategists’ recommended stock allocations, is approaching a “buy” signal. The indicator’s current level implies a 15.5% price return for the S&P 500 over the next 12 months, according to Subramanian.
