Nasdaq futures feel more heat as bond yields continue to surge

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US stock futures continued to feel the pressure on Monday as bond yields soared to new highs.

What’s happening
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On Friday, the Dow Jones Industrial Average DJIA,
rose 138 points, or 0.4%, to 34721, the S&P 500 SPX,
declined 12 points, or 0.27%, to 4488, and the Nasdaq Composite comp,
dropped 186 points, or 1.34%, to 13711. The tech-heavy Nasdaq Composite slumped 3.9% last week, its worst performance since late January.

What’s driving markets
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The yield on the 10-year Treasury TMUBMUSD10Y,
rose to the highest level since 2019, at 2.75%. Yields move in the opposite direction to prices.

The rise in bond yields makes the valuation of stocks — in particular longer-duration growth stocks — less appealing.

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Ahead of bank earnings and inflation data later in the week, traders were left focusing on the health of the market.

Michael Darda, chief economist and market strategist at MKM Partners, says the S&P 500 is overvalued even with the recent pullback. He said that for the equity risk premium — the earnings yield minus the bond yield — to move back to its five-year average, one of four things would have to happen: bond yields to fall by around 100 basis points, earnings to rise about 20%, the stock market to fall about 17% or some combination of the three.

“Our valuation work shows that financials remain the most attractive cyclical sector while healthcare is the most attractive defensive sector. High valuation tech across the capitalization structure remains an ‘avoid’ or a short, in our view,” said Darda.

The impact of China’s lockdowns was shown as the electric vehicle maker Nio NIO,
said it would have to suspend production. And Elon Musk was in the headlines as the mercurial Tesla TSLA,
chief executive now will not be joining the board of Twitter TWTR,
the social-media service where he’s the top shareholder.


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