The rebound in 10-year US Treasury yields that began in early December amid market worries over the course of US monetary policy was mirrored in declines for the US Russell 2000 small-cap equity index and the Russell 1000 Value. Benchmark US yields continued higher early in the New Year.
The US 10-year T-note yield had risen by a sizeable 79bp to end the last quarter of 2024 at 4.57%.
News in mid-December from the policy-setting meeting of the Federal Open Market Committee and the release of the US Federal Reserve’s ‘dot plot’ and Summary of Economic Projections has pointed to a central bank far more worried about inflation than markets had expected, and one less interested in swift cuts in policy rates.
Equity markets quickly reflected the prospect of scaled-back rate cut expectations and a higher discount rate and fell sharply. The impact was largest in the most interest-rate sensitive parts of the market, namely, small-cap stocks (due to their generally higher leverage), and the tech segment (due to longer-duration earnings).
Now that equities have incorporated a likely higher discount rate, company earnings should reassert themselves as the key determinant of the stock market’s future course.
If analysts’ estimates of earnings growth in the upcoming quarters are broadly correct, the trend in equity prices should be positive.
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