Is a major reversal in stock-bond allocation approaching? Bank of America issues rare signal: Bonds compete with stocks for capital for the first time in decades, S&P 500's return over the next ten years may be less than 5%
Savita Subramanian, Head of US Equity and Quantitative Strategy at Bank of America, said in an interview on Wednesday that the bond market is becoming attractive again and has, for the first time in decades, become a real competitor to the stock market.
According to Zhitong Finance APP, Savita Subramanian, Head of US Equity and Quantitative Strategy at Bank of America, said in an interview on Wednesday that the bond market is becoming attractive again, and for the first time in decades, it is a real competitor to the stock market. She also warned that investor sentiment has clearly surged, while analysts’ expectations for US equity earnings growth are at extremely high levels. This means the stock market is more likely to come under pressure from missed expectations rather than usher in more positive surprises.
Subramanian pointed out that according to Bank of America’s valuation framework, the S&P 500’s return over the next 10 years may not even reach 5%. Meanwhile, the risk-return on 10-year US Treasuries has now risen to about 5% or even higher. “When you look at bonds from a risk-adjusted perspective, you’ll find that this is the first time in decades that bonds look interesting again,” she said.
This judgment coincides with the view of Jim Bianco, President of longtime bond bear Bianco Research and macro strategist. Bianco had previously stated that bonds are finally trading at fair value, the current rate levels offered by long-term debt are fundamentally appropriate, and after years of being overvalued, bonds are attractive again, making now a good time to invest in them.
Subramanian stated that US policymakers are closely watching to prevent long-term interest rates from rising excessively. Both the Federal Reserve and the Treasury Secretary are closely monitoring the long end of the yield curve. She also mentioned that demographic trends may mean the current interest rate cap is lower than in the 1970s and 1980s, while artificial intelligence (AI) may ultimately bring deflationary pressure. These factors together create a potentially more attractive backdrop for bonds. She believes yields are unlikely to rise significantly above the 6% to 7% range; even if they reach such levels, the stock market should be able to withstand it.
Recently, the bond market has experienced a dramatic sell-off as markets repriced expectations that the Federal Reserve might raise rates to curb energy-driven inflation. On Wednesday, the yield on the 10-year US Treasury once rose to 5.368%, marking its highest level since early 2002, and was reported at 5.337% at the time of publication, while the yield on the 30-year US Treasury was at 5.719%.
By comparison, the stock market has so far shown strong resilience in the face of rising yields. The S&P 500 closed at a record high on Tuesday, its first since August, mainly supported by robust corporate profits and prospects for AI-related spending.
However, Subramanian believes this optimism itself is something to be wary of. She pointed out that analysts expect S&P 500 earnings growth over the next five years to reach a forty-year—or even record—high. “When expectations are this high, disappointment is more likely than actual positive surprises.”
“This isn’t the tech bubble of 2000, but I do worry that market sentiment has become extremely bullish,” she added, noting that a natural slowdown in corporate earnings growth is almost inevitable, as a large part of previous gains was due to one-off projects by tech companies. At the same time, AI infrastructure bottlenecks may pressure corporate profit margins, while the market has already priced in margin expansion in advance.
She further described the contradictions in current market assumptions: investors appear to be expecting a ‘frictionless’ environment—capital spending will exceed expectations, AI revenue will also exceed expectations, and everything will go smoothly. Interest rates will remain low. Spreads will keep narrowing. “But all of this seems a bit difficult,” she said.
In terms of year-to-date performance, the yield on the US 10-year Treasury has risen nearly 27% so far this year, outperforming benchmark stock indexes in terms of yield change. Over the same period, the tech-heavy Nasdaq 100 ETF — Invesco QQQ Trust (QQQ.US) has risen about 22%; S&P 500 ETF — SPDR (SPY.US) and Dow Jones Industrial Average ETF — State Street SPDR (DIA.US) have climbed about 13% and 7%, respectively. The rise in the 30-year Treasury yield has outperformed the S&P 500 and Dow, but lagged behind the Nasdaq.
Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
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