The Convergence of Asset Returns
Today, the American asset market presents a peculiar scene. Since 2025, the return gaps among major asset classes have significantly narrowed, reaching the smallest value in the past 40 years. The return rate of the S&P 500 stock index is approximately 4.7%, the yield on 10-year U.S. Treasury bonds is 4.4%, and cash interest remains around 4.5%. It's as if three originally distinct race tracks now have competitors whose speeds are nearly identical. This situation is caused, on one hand, by the Federal Reserve's series of operations in response to previous inflation, which brought cash and bond yields back to normal levels before 2008; on the other hand, the high valuation of stocks in the S&P 500 and changes in corporate profit margins have depressed stock return rates, while good corporate balance sheets have reduced the demand for additional yields on corporate bonds.
Rising bond yields pose a danger to the stock market
Recently, there have been new developments in the bond market. If bond yields continue to rise, the stock market will be in danger. From the perspective of investors, everyone invests to make money and hopes for lower risk. Now that the returns on stocks, bonds, and cash are already quite similar, a rise in bond yields immediately makes bonds more attractive than stocks. Bonds are relatively stable, with lower risk, and as returns increase, who wouldn’t want to pull their money out of the stock market to buy bonds? This could lead to a large number of investors selling stocks.
From the perspective of stock market valuation, rising bond yields equate to an increase in the market's risk-free interest rate. The value of stocks is largely estimated based on how much money they can make in the future. When the risk-free rate rises, the present value of future earnings from stocks decreases, putting downward pressure on stock prices. Currently, stock market valuations are not low, and against the backdrop of rising bond yields, it’s like a balloon that has been inflated too much, which could burst with the slightest disturbance. If corporate earnings fail to meet expectations, the stock market could face a more severe sell-off.
Investor Choices and Market Outlook
In the face of this complex market situation, many investors have already begun to take action. Many are turning their attention to overseas markets, hoping to find better investment opportunities elsewhere. For ordinary investors, it is crucial to be more cautious in asset allocation and to avoid putting all their eggs in one basket. It may be appropriate to increase the proportion of bonds in their portfolios to reduce the risks brought by stock market volatility.
From an overall market perspective, this change in the American asset market is likely to continue for some time. In the future, the trends of the stock and bond markets will largely depend on economic data, the direction of Federal Reserve policies, and other factors. If the economic data improves and corporate earnings grow strongly, the stock market may stabilize; but if bond yields continue to rise, the stock market could experience a difficult period.
