Brendan McDermid/Reuters
- It's possible for the S&P 500 to return to its July high of 4,589 if bond yields keep falling, DataTrek says.
- Investors need to see the 10-year Treasury yield dip below 4% for equities to rally.
- Forward earnings expectations have climbed since July, but interest rates are much higher since then.
Stocks have rallied to start November, but the market's path back to—and ultimately beyond—this summer's high is obstructed by one big hurdle.
The S&P 500 touched a high of 4,589 in July, but a note on Monday from DataTrek Research says that bond yields need to come down a lot more for stocks to reclaim that level by the end of the year.
"Equities need to see a clear pathway for 10-year Treasuries to get back below 4 percent, since that is where they were at the July highs," DataTrek co-founders Nicholas Colas and Jessica Rabe wrote in a note on Monday. "Given our prior point about lower Q4 earnings estimates, lower rates are an especially important catalyst going into year end."
Major indexes are coming off their best weekly performances of the year, and there could still be upside ahead, according to the firm. Colas and Rabe wrote that falling yields on the 10-year Treasury could spark enough momentum for stocks to rally back to levels last seen four months ago, but the benchmark bond would need to rally sharply from here, even after last week's big move down in yields.
The S&P 500 jumped 5.9% in the five days through last Friday, and it marked a welcome change in investor sentiment amid strong corporate earnings and a softer-than-expected labor market report. Friday's closing mark of 4,358 still remains 5.4% below the highs for the year.
DataTrek says the two key drivers of stock valuations are expected earnings and interest rates, and both have fluctuated between July and November.
"On July 31st, Wall Street analysts were expecting the S&P to earn $231.02/share over the next 4 quarters (Q3 2023 to Q2 2024). Ten-year Treasuries yielded 3.96 percent," the strategists said. "Today, analysts expect the index to earn $236.64/share over the next 4 quarters (Q4 2023 to Q3 2024), 2.4 percent more than their late July estimate. Ten-year Treasuries yield 4.58 percent, 0.62 percentage points more than on July 31st."
While forward earnings expectations have climbed over the last several months, interest rates are much higher than three months ago.