Strong US growth and renewed inflation concerns have pushed Treasury yields higher.
- The FOMC raised the federal funds target rate by 25 basis points in September.
- High energy prices and strong US economic data have added to inflation concerns. September consumer price inflation was higher than consensus forecasts. The core rate, which excludes food and energy, rose to 2.6% on an annual basis.
- The 10-year US Treasury yield rose to 5.34% in early October, its highest intraday level since 2002, though it has since moderated to around 5.1%.
But we believe US equity markets can withstand a measured tightening cycle.
We expect 25-basis-point rate hikes from the Fed in December and March.
Markets are pricing roughly three hikes over the next 12 months.
Strong GDP growth this year (near 2.5% annualized in the first half, and the third quarter tracking around 3%) has increased confidence that the US economy can absorb a longer period of elevated rates.
So, resilient earnings and higher starting yields continue to offer investment opportunities.
- We forecast S&P 500 earnings growth of 25% in 2026 and 14% in 2027, which should help equities absorb moderately higher yields while US economic growth remains firm.
- We recommend positioning for further equity gains while diversifying across regions, sectors, and return drivers and managing concentrated single-stock exposure.
- We rate fixed income as Attractive and see opportunities to add portfolio income through medium- to long-duration high-quality bonds and medium-maturity credit from stronger investment grade issuers.
New this week
New York Fed President John Williams said policymakers should continue to look at "underlying trends" in US inflation amid upward price pressures from energy and AI-related spending. He added that he still believes there are "disinflationary forces at play."
Did you know?
- US factory activity has remained in expansion territory for eight consecutive months. Historically, US manufacturing expansions have lasted nearly three years on average.
- Past US economic downturns generally did not begin until at least two years after the Fed started raising rates, although the timing varied with the scale of the tightening cycle.
Investment view
We expect the Fed to raise rates by 25 basis points in December and March, and do not believe a measured tightening cycle will derail the US economy or equity rally. Investors should maintain diversified equity exposure and use the rise in yields to add selectively to quality bonds, while remaining cautious on the longest maturities and lower-quality credit.
