Strong tech-driven rally has helped the S&P 500 escape the pull of rising interest rates

The U.S. stock market, as measured by the S&P 500, is pushing higher through bond-market volatility.

The bond market has a reputation for being boring. But lately, it has been the source of much of the action in the U.S.

Rising Treasury yields have caused bond-market volatility to spike. At the same time, the U.S. stock market has remained relatively calm. So far, a strong tech-driven rally has helped the S&P 500 escape the pull of rising interest rates.

The U.S. stock market's Cboe Volatility Index VIX was down Friday and trading well below its long-run average in a sign of near-term confidence in the bull market. The measure's move lower is a striking divergence from the recent spike in the bond market's volatility gauge, the MOVE index.

The jump this week in the MOVE index coincided with a surge in Treasury yields that triggered losses in U.S. bonds but did not keep the S&P 500 SPX from posting a weekly gain that put it back in positive territory for this month.

The stock market's resilience may seem surprising against a rapid rise in Treasury yields, considering such moves in the past proved more troublesome for equities, said Angelo Kourkafas, senior global strategist at Edward Jones, in a phone interview Friday. But the difference this time may be that rates are rising partly for "positive reasons" linked to the strength of the U.S. economy, he said, while also pointing to the S&P 500 benefiting from a recent rally in tech and megacap stocks.

While the U.S. stock market has sometimes stumbled this year after Treasury yields' sudden bursts higher, Kourkafas sees economic growth and a rotation into tech helping the S&P 500 digest higher rates.

The widely followed index of U.S. large-cap stocks is, so far, up both this month and this quarter, even as Treasury rates have risen over both periods. This week saw Treasury rates touch fresh multiyear highs. The yield on the 10-year Treasury bond BX:TMUBMUSD10Y rose Friday to 5.180%, settling at its highest level since July 6, 2007, according to Dow Jones Market Data.

Still, a weekly gain in tech-related stocks has helped the S&P 500 push higher, as its largest sector by far is information technologyXX:SP500.45. The broad index is also top-heavy with megacap Big Tech stocks, such as Facebook parent Meta Platforms, whose shares soared this week.

"The big reason why the stock market is ignoring the relentless rise in yields this time around is because of the tech sector's strong recovery to start fall," said Hardika Singh, economic strategist for market intelligence at Fundstrat, in an emailed note Friday. "Meta's new AI agent Muse has reignited investors' decades-old love affair with tech."

Meta's shares (META) rallied almost 13% this week to bring its huge September gain to around 31%, according to FactSet data. That has helped lift the Roundhill Magnificent Seven ETF MAGS - which holds seven closely watched Big Tech stocks including Nvidia (NVDA), Apple (AAPL), Google parent Alphabet (GOOG) (GOOGL), Microsoft (MSFT), Amazon.com (AMZN) and Tesla (TSLA) - to rise 3.1% this week.

Nearly all of those stocks are up so far in September, according to FactSet data.

Investors have been gravitating back toward parts of the stock market that are "less reliant on lower rates," said Kourkafas. Lately, tech and megacap growth stocks are doing "the heavy lifting," as investors rotate into those segments rather than exiting equities altogether, he said.

The S&P 500 is up 0.7% this month, rising on the back of its tech sector's much larger climb of 4.8% over the same period, according to FactSet data. Tech is up around 7.5% so far this quarter, easily outpacing the S&P 500's advance of more than 3% during the third quarter.

The stock market's Cboe Volatility Index, which trades under the ticker symbol VIX, fell around 5% on Friday to a bit below 15, FactSet data showed. That compares with its long-term average of about 19.4 since 1990, according to Dow Jones Market Data.

"For there to be pain in the stock market, increases in the MOVE typically have to coincide with jumps in the VIX," Singh said. The MOVE index has jumped more than 27% in September as Treasury yields have climbed across the board, with the gauge on track for its biggest monthly surge since March, according to FactSet data through Friday. By contrast, the VIX was down modestly this month, as of Friday afternoon.

While "the speed with which rates are rising could become problematic for stocks," investors may view recent increases in bond yields as "a normalization of the interest-rate environment" due to U.S. economic growth, according to Kourkafas. Although the Fed decided to lift its benchmark rate earlier this month as inflation remains too high, further increases may be partly reflecting a stronger U.S. economy, he said.

Today is not like 2022, when the Fed was battling surging inflation with an aggressive rate-hiking cycle, Kourkafas noted. In his view, the Fed may be adjusting its policy rate up toward a level that neither stimulates nor restricts economic growth.

The U.S. stock market closed higher Friday, with the S&P 500, tech-heavy Nasdaq Composite Index COMP and Dow Jones Industrial Average DJIA all rising. The S&P 500 finished 0.7% below its record close of 7,798.99 booked Aug. 13, according to Dow Jones Market Data.

"We're still seeing corporate America generating very strong profit growth," said Kourkafas, which fundamentally supports stocks.

-Christine Idzelis