Chris Wood, global equity strategist at global brokerage firm Jefferies, said the US stock market has so far remained strong despite rising bond yields and geopolitical tensions. The main reasons for this are strong corporate earnings and rising AI-related investments. However, he warned that risks to equity markets are now rising, as bond yields are reaching levels that could put pressure on stock valuations.
In his weekly newsletter “Greed and Fear,” Chris Wood said the recent rise in US Treasury yields is becoming a key risk point for stock markets. The 10-year US government bond yield has reached 5.34 percent and the 30-year bond yield has reached 5.69 percent, the highest level since 2002.
He said that the effect of increase in global bond yields is clearly visible on Indian markets also. The Indian stock market closed down for the eighth consecutive week and the rise in US yields was a major reason for investor caution.
Chris Wood said that historically US stock markets experience weakness before mid-term elections and recovery thereafter. But this time this pattern has not been clearly visible, the main reason for which has been better than expected earnings of the companies.
He said a major reason for the strength in corporate earnings is the current cycle of AI-based capital expenditure. Technology companies are investing extensively on AI infrastructure, which has supported their revenues and profits. This is why the US stock market has remained relatively strong despite high interest rates and global uncertainties.
However, the biggest question now facing investors is how long the AI investment cycle will continue. Wood believes the market's biggest concern is whether companies will be able to get adequate returns from the huge investments they are making in AI.
He said that if AI projects do not yield the expected benefits, the pace of the current investment cycle may slow down, which may impact the earnings of technology companies and the stock markets.
Chris Wood also pointed to another major concern. According to him, the government bond markets of G7 countries are in a phase of structural recession. Persistently high bond yields could further tighten global financial conditions.
When bond yields rise, fixed income assets become more attractive to investors. This could reduce the attractiveness of investing in equity markets, especially if bond yields rise further.