Global Fund Managers Increase Equity Allocations Despite Rising Bond Yields
Global fund managers have pushed equity allocations to their highest levels since late 2021, largely shrugging off the growing risk that a disorderly rise in bond yields could derail the current market rally.
Global fund managers have increased their equity allocations to 56 percent of their portfolios, the highest proportion recorded since November 2021, according to the latest Bank of America Corp survey. This bullish positioning persists even as investors identify a disorderly rise in bond yields as the second-largest threat to the equity market, trailing only concerns about an artificial intelligence bubble.
A quarter of survey respondents pointed to a second wave of inflation as the most significant risk to their portfolios. Market observers note that this surge in yields represents a critical vulnerability for equities that have struggled to maintain record highs over the past year. Tyler Richey, editor of the Sevens Report Technicals newsletter, described the jump in yields as the "elephant in the room" threatening to derail the market.
Despite these warnings, Wall Street strategists generally conclude that current yield levels are not yet high enough to invalidate the bullish case for stocks. Historical precedents suggest that sudden spikes in borrowing costs do not automatically translate into equity market declines. JC O’Hara, chief technical strategist at Roth Capital Partners LLC, advised investors to remain bullish or opportunistic.
O'Hara noted that risk appetites are improving due to stronger earnings expectations and a better economic outlook. He also highlighted a reduced focus on Middle East tensions as a supporting factor. Forward returns for the S&P 500 have tended to be strong when overall risk appetite is on the rise.
The Tipping Point
Market bulls acknowledge there is a threshold where rising rates will begin to negatively impact stock valuations. Liz Ann Sonders, chief investment strategist at the Schwab Center for Financial Research, indicated that a move in yields closer to 5 percent would likely rattle the market. She compared this potential scenario to the dynamics observed in 2023.
During that period, the S&P 500 sank 10 percent between the end of July and late October. That decline coincided with a surge in the 10-year yield, which briefly touched the 5 percent mark.
The current market environment remains precarious as investors balance strong equity momentum against mounting fixed-income pressures. As Matt Maley, chief market strategist at Miller Tabak + Co., observed, bond yields can move higher while the equity market ignores the shift, until it suddenly cannot.
