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▲ U.S. Stock Market, Artificial Intelligence (AI), Treasury Bonds/AI Generated Image
While the U.S. stock market continues its record-breaking rally, the bond market is sounding a contrasting warning. With the 10-year Treasury yield rising to 4.46%, there's a warning that if the high expectations of a 24.4% increase in Q2 corporate earnings are not met, the artificial intelligence (AI) investment frenzy and the stock market's upward trend could both be put to the test.
According to U.S. economic media outlet Barron's on July 6 (local time), the U.S. 10-year Treasury yield rose by more than 10 basis points last week to 4.46%. The 2-year Treasury yield also exceeded 4.1%, remaining higher than the federal funds rate of 3.5-3.75%. Antonio Gabriel, a global economist at Bank of America (BAC), stated, “The market sees hawkish Fed Chairman Kevin Warsh lowering inflation through tighter real interest rates.”
The stock market, however, surged in the opposite direction of bonds. Last week, the S&P 500 Index (SPX) rose by more than 1.76%, and the Nasdaq Composite Index increased by over 2.1%. The Dow Jones Industrial Average jumped 2%, closing at a record high of 52,900. Raffi Boyadjian, Senior Market Analyst at Trading Point, said, “While the bullish trend is clear ahead of Q2 earnings announcements, there is a strong possibility that investor caution will increase.”
Market expectations are already high. According to LSEG data, Q2 corporate earnings are projected to increase by 24.4% year-over-year, with total earnings just under $700 billion. Financial industry earnings alone are expected to be $116.3 billion. Boyadjian stated, “The key is whether AI capital expenditures by large information technology companies are actually generating significantly higher revenue growth, and whether demand for semiconductor companies and other AI infrastructure companies continues to increase.”
However, the strength of AI and semiconductor leading stocks is already weakening. The PHLX Semiconductor Index soared over 70% since the beginning of the year, leading the market rally since its late March low, but it has fallen by more than 16% from its June 22 high. The index of the seven largest U.S. mega-cap tech stocks only rose by 0.7% during the same period and remained more than 9% below its late May peak. Megan Fisher, an economist at Capital Economics, warned, “The key question is whether corporate earnings can meet high expectations. If not, the sustainability of both the stock market rally and the AI capital expenditure frenzy will be called into question.”
Despite falling oil prices, weaker-than-expected employment figures, and signs of slowing economic growth in Q2, Treasury yields did not fall. Barron's noted that there were several reasons for Treasury yields to decline at the beginning of Q3, but this did not lead to higher bond prices, suggesting the possibility that the bond market is sending an early warning to the stock market.
[Article Key Summary]
-The U.S. 10-year Treasury yield was 4.46%, and the 2-year Treasury yield exceeded 4.1%, showing a diverging trend from the stock market's strength.
-Q2 corporate earnings growth is expected to be 24.4%, but the PHLX Semiconductor Index has fallen by more than 16% since its June 22 high.
-A warning has been issued that if corporate earnings fail to meet high expectations, the sustainability of both the stock market rally and the AI capital expenditure frenzy could simultaneously be put to the test.
*Disclaimer: This article is for investment reference only, and we are not responsible for any investment losses based on it. The content should be interpreted for informational purposes only.*
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