Wednesday's Market Minute: Bulls Should Brace For Harsh Earnings Judgment

The biggest difference between the past 52 weeks and the preceding period is that technology stocks have been trading in sync with higher Treasury yields, instead of inverse to them. 

Recent examples include Alphabet GOOGL and Meta META, which both achieved one-year highs this month even as rates broke out. Earlier this summer, the 30-day correlation between the Nasdaq-100 and the 10-year yield actually got as tight as +0.8, the polar opposite of the case that was much of 2022. But lately that cross-asset kinship has deteriorated.

The S&P 500 has made lower-highs and lower-lows since an impressive GDP report on July 27 sent bonds tumbling and the stock market alongside them. But we’re down less than 5% since, and the Nasdaq is still range-bound. The resilience of big growth names is somewhere between impressive and shocking, considering how far bond yields have risen, simultaneously eating away at the risk premium of equities. The tradeoff between the S&P’s earnings yield and what you can get in the 2-year is the most extreme since the dot-com era, and only worsens every time stocks rise with yields.

This earnings season is the first opportunity to realize this degradation of equity value since the bond market started crashing again, which means the next few weeks are likely to be rough for bulls. The strength of charts like Apple (AAPL), Nvidia (NVDA), Alphabet and Meta – even Tesla (TSLA) or Salesforce (CRM), which are only down 10% off recent highs – is a double-edged sword. On one hand, it means it would require more than just a rough patch to break the technical trend. On the other hand, it means valuations are the most exposed in a year.

Nvidia is, of course, the Atlas holding all of it up; the stock’s barely budged from its extraordinary AI-powered uptrend. Yet on Tuesday, the market found a soft spot in U.S.-China trade relations and the shares took a real hit. I wrote earlier this year that “Even Nvidia Plays Second Fiddle to Bonds,” and I’m not totally certain about that anymore. In other words, regardless what happens on the macro front, if that stock loses its footing, the whole market may be up for grabs.

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