MW How Treasury yields are driving whether U.S. stocks beat the rest of the world

By Christine Idzelis

'U.S. economy is outperforming the rest of the world even with still-high interest rates,' says DataTrek's Nicholas Colas

Treasury bond yields are clearly influencing how U.S. stocks behave this year relative to equities in the rest of the world, with the S&P 500 outperforming in 2024, according to DataTrek Research.

"Ten-year Treasury yields have been the most important driver of marginal global equity dollar-based returns this year," said Nicholas Colas, co-founder of DataTrek Research, in a note emailed Tuesday. "The relationship is clear," he said; when yields on the 10-year Treasury note BX:TMUBMUSD10Y rise or are stable, U.S. stocks outperform, but when they fall, "rest-of-world stocks do better."

DataTrek tracked that relationship in the chart below, which shows U.S. stocks gauged by the S&P 500 SPX widely outperformed when Treasury yields were rising in the first three months of 2024, as well as in the fourth quarter through November. U.S. equities also beat stocks in the rest of the world when Treasury yields were "stable" in the second quarter, Colas found.

When the 10-year Treasury yield dropped in the third quarter, U.S. stocks were trounced by the rest of the world, the chart above shows. Colas measured the rest of the world by the MSCI All-Country ex-U.S. Index.

"Investors are clearly worried that higher Treasury yields will slow global growth by putting a floor under non-U.S. interest rates, and therefore only favor non-U.S. stocks when interest rates decline," said Colas.

The yield on the 10-year Treasury note is up so far this quarter, trading Tuesday at around 4.2%, according to FactSet data, at last check.

"The market sees higher Treasury yields as reflective of stronger U.S. economic growth," said Colas. "This adds another layer to the argument that non-U.S. stocks can only work when Treasury yields move decisively lower, a signal that the difference between U.S. and rest-of-world growth is diminishing."

The S&P 500 was trading about flat Tuesday afternoon for a climb so far this quarter of 4.9%, according to FactSet data, at last check. That beats the 4.1% loss this quarter for the iShares MSCI ACWI ex U.S. ETF ACWX, an exchange-traded fund that tracks stocks globally outside the U.S.

"U.S. equities should continue to ride the current wave of election-driven optimism through year-end and into 2025," said Colas, referring to the November victory of Donald Trump in the U.S. presidential election. "The U.S. economy is outperforming the rest of the world even with still-high interest rates, with both factors reinforcing the dollar's reserve-currency status."

The S&P 500 has rallied 26.8% in 2024 based on Tuesday afternoon trading, far exceeding the 7.5% gain year to date for shares of the iShares MSCI ACWI ex U.S. ETF, FactSet data show, at last check.

-Christine Idzelis

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December 03, 2024 13:31 ET (18:31 GMT)

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