The S&P 500 index has showcased impressive growth, surging by nearly 13% since the beginning of 2023. However, recent fluctuations in August and September have caused cautious investors to cast doubt on the sustainability of this momentum. Many are closely monitoring Treasury yields and contemplating selling equities if yields surpass a critical threshold.
To mitigate potential losses, investors are actively allocating a substantial portion of their portfolios to cash and T-bills. This strategy may serve as a defense mechanism against future market downturns, as suggested by Bank of America’s Michael Hartnett.
According to Hartnett’s weekly “Flow Show” report, the key condition for stocks to remain stable is for Treasury yields to stay below 5%. Should yields breach this level, the pressure to sell could intensify rapidly. Currently, shorter-term Treasury yields already exceed 5%, but investors are predominantly focused on the 10-year and 30-year yields, which have yet to experience a sustained breakthrough.
Hartnett asserts, “As long as Treasurys stay below 5%, SPX can maintain levels above 4.2k in the near term despite the prevailing bearish sentiment.”
In early October, both the 10-year and 30-year Treasury yields reached their highest points in 16 years but subsequently retreated, leading to a moderation in stock valuations.
Additionally, Hartnett highlights a phenomenon dubbed the “Magnificent Seven”: a select group of megacap stocks that collectively comprise almost 30% of the S&P 500’s market capitalization—a historic record. The “Magnificent Seven” includes Apple Inc., Microsoft Corp., Amazon.com Inc., Tesla Inc., Alphabet Inc., Meta Platforms Inc., and Nvidia Corp.
Although technology stocks experienced a decline on Friday, causing the Nasdaq Composite to be on track for a weekly loss, they had shown significant outperformance earlier in the week. The S&P 500 and Dow Jones Industrial Average also traded lower on Friday afternoon but were still poised to achieve weekly gains, according to FactSet data.
