This month, the rise in long-term interest rates has heightened investor anxiety about the future of the stock market.

Treasury yields hit new highs in 2024 over the past week after new data showed lingering inflation. At the start of the year, Wall Street traders expected the Federal Reserve (Federal Reserve) to cut interest rates six times. Now, they even estimate that it will be lowered only once. The yield on the benchmark 10-year Treasury note has risen nearly a percentage point from its February low, closing at 4 on FridayCrashbandicoottrilogyps4.668%.

Many worry that a rebound in yields will hamper further gains in stock prices, especially if stocks are relatively expensive relative to corporate earnings. The rise in yields triggered a sharp fall in the stock market in 2022, reducing the extra returns from the extra risk of investors holding stocks rather than bonds, while eroding Wall Street's present value of the company's future profits.

On Thursday, stocks fell and yields soared amid weaker-than-expected US economic growth data and higher-than-expected inflation expectations, highlighting the current tensions. But shares rebounded on Friday, driven by strong earnings from companies such as Google's parent company Alphabet and expectations of the Fed's preferred inflation indicator.

Rick Rieder, chief investment officer for global fixed income at BlackRock, the asset manager, said: "the market's reaction to the Fed's March rate cut and six rate cuts this year is too fanatical. Now, this thought process has been completely redesigned, whenCrashbandicoottrilogyps4When you go through this process, you will see that the market is very nervous looking for any possible information. "

At the end of Wednesday's Fed meeting, traders will re-examine the outlook for interest rates from Fed Chairman Jerome Powell. Attention will then turn to Friday's jobs report, looking for clues about the health of the economy. The Treasury will also unveil its latest quarterly borrowing plan this week, providing investors with details of how the government will borrow to cover the budget deficit.

Steve Sosnick, chief strategist at Interactive Brokers, said many people largely ignored the rise in yields this year as the strong economy boosted corporate profits. That is one reason why the s & p 500 closed 2.9% below its record high set on march 28. It is still up 6.9% this year.

But the climb has pushed valuations higher. On Friday, S & P 500 companies traded at about 24 times earnings over the past 12 months, well above their 10-year average of about 20. The slowdown and higher-than-expected inflation in Thursday's report suggest that the outlook may be bleaker than many expected.

"stocks can withstand stronger returns because it's based on a stronger economy," Sosnick said. This looks even more worrying. If inflation further spooks the bond market, that will be a problem. "

Bonds face other challenges. The US government is selling new debt at a record pace, raising fears that the market will struggle to digest the coming new debt boom. The sell-off triggered by hot consumer price index (CPI) data intensified this month after sluggish demand for the sale of $39 billion of 10-year Treasuries in the US. The rise in short-term bond yields also reduces the attractiveness of long-term bonds, making them more volatile.

Taken together, these factors make the outlook less optimistic than bullish investors at the start of the year had hoped, but it is still far from a disaster, said David Kelly, chief global strategist at J.P. Morgan Asset Management.

"I still think the economy is slowing down and inflationary pressures are slowing down," Kelly said. To the extent that the market is still booming, there is nothing wrong with having some steam. "

On Friday, enthusiastic investors poured back into large technology stocks, the cornerstone of the recent market rally. Communications services stocks in the s & p 500 surged 4.7%, which rose sharply after the announcement of profit growth by Die Alphabet and Microsoft.

If interest rates remain high, the more speculative parts of the market and the shares of some technology companies with very high valuations will make Kelly hesitant.

"over time, high interest rates will undermine some of the most false bets in financial markets," he said. Cryptocurrencies, gold or some growth stocks that have long benefited from low interest rates, I think they are all vulnerable. "

Many on Wall Street still expect yields to fall by December as inflation slows again. Economists at Goldman Sachs have postponed expectations of interest rate cuts, but still expect two rate cuts this year.

BlackRock's Rieder believes that yields are likely to fall by the end of the year, either because the Fed has cut its benchmark interest rate or because the Fed has signaled a cut. But in the short term, he expects yields to continue to fluctuate and potentially soar.

My feeling is that these interest rates will fall by the end of the year, but in the short term, people will be cautious. There is a lot of uncertainty, "Rieder said.