Summary of Key Points
Recently, global long-term government bond yields have soared to nearly their highest levels in 20 years, yet stock markets have not declined significantly and remain near record highs. Unlike in 2022, when the bond market crash caused a $18 trillion loss in stock market value, the resilience of the stock market this time can be attributed to factors such as corporate earnings exceeding expectations, strong economic resilience, gradual increases in yields, and optimistic expectations driven by AI. However, future risks still exist: if yields surge suddenly, the economy experiences a recession, or the Federal Reserve raises interest rates beyond expectations, the stock market could be overwhelmed.
I. Why Didn't the Stock Market Collapse Despite the Bond Market Drop?
In simple terms, there are four “cushions” supporting the stock market:
1. Strong Corporate Earnings: Corporate performance in Asia, Europe, and the United States in the second quarter of this year far exceeded analysts' expectations, with profits of the S&P 500 components increasing by 33% year-on-year, one of the strongest quarters on record. Higher corporate earnings provide support for stock prices, offsetting the negative impact of the bond market.
2. The Economy Is Not as Fragile: The rise in bond yields is partly due to market confidence that the economy can withstand challenges (rather than being driven solely by inflation or fiscal pressures). For example, despite high oil prices and concerns about the Iran war, global economic growth has been better than expected, and there is less fear of a recession.
3. Gradual Yield Increases: In 2022, U.S. bond yields rose sharply (doubling in one year), while this time they have been increasing slowly. The MOVE index, which measures bond market volatility, is currently very low, indicating orderly trading and no panic selling, giving the stock market time to absorb the changes.
4. Optimistic Expectations About AI: There was no AI boom in 2022, but now there is belief that AI can drive future corporate earnings growth, motivating investors to support tech stocks even as bond market yields rise.
II. What Makes This Bond Market Shock Different from 2022?
Compared to 2022, the current situation may be more dangerous, but the stock market's reaction has been milder. The key differences are:
1. Central Bank Attitudes: In 2022, central banks were slow to respond to inflation and then suddenly raised interest rates, catching the market off guard; interest rates are already high, and the Federal Reserve may continue to raise them, but the market is prepared for this.
2. Economic Expectations: In 2022, there was fear of a recession, leading to a sharp drop in the stock market; now, there is optimism that the economy can stabilize, and even that AI can drive growth. Corporate profit expectations for 2023 (only 0.9% increase in S&P earnings in 2022, compared to a projected 27% increase this year) are more positive.
3. AI as a New Factor: AI is a new factor this time; investments in AI by tech giants are seen as capable of generating long-term returns, boosting stock market confidence.
III. What Hidden Risks Does the Stock Market Currently Face?
Although the stock market has shown resilience so far, several risks should be monitored:
1. Stocks Are Less Valuable Than Bonds: The difference between the S&P 500 earnings yield and the 10-year U.S. bond yield (i.e., the extra return expected from investing in stocks versus bonds) has been negative this year, indicating greater risk and lower returns compared to bonds, a rare occurrence in the past 20 years.
2. The 5% Yield Threshold: If the 10-year U.S. bond yield breaks through 5% and persists, the market may panic, as this level has historically triggered a shift of funds from the stock market to safer bonds.
3. Potential Drag on Consumer Spending: Consumer spending accounts for two-thirds of the U.S. economy. Rising interest rates will increase the cost of mortgages, car loans, and credit cards, weakening purchasing power. Although tech sectors currently dominate the stock market, weak consumer spending will ultimately affect the overall economy.
IV. What Could Really Overwhelm the Stock Market?
The stock market is most vulnerable to “sudden surprises.” The following three scenarios could be devastating:
1. Sudden Yields Surges: If there is panic selling in the bond market and yields rise sharply (for example, from 4.5% to 5.5% in a few days), the stock market may not have time to adapt and is likely to experience a sharp decline.
2. Sudden Economic Slows: If the economy indeed enters a recession, investors will quickly move funds from risky stocks to safer bonds, causing the stock market to fall.
3. Federal Reserve Raising Interest Rates Beyond Expectations: For example, a 50-basis-point increase in interest rates all at once (rather than the usual 25 basis points) or multiple increases could significantly increase the cost of borrowing for companies, squeezing their profits and impacting the stock market.
In summary, the stock market is currently in a “safe zone,” but it is getting closer to the red line of risk. The key will be whether future bond market fluctuations are orderly, whether the economy can remain stable, and the Fed's interest rate policy—these factors will determine whether the stock market can continue to hold its ground or be dragged down by the bond market.