U.S. Equity Market Overview
(But It’s Really Just Big Tech and Rates)
On the surface, the story of U.S. equities this year has been one of push-pull against the U.S. treasury rates market.
The slow inertia of slow growth in earnings has been met by the immovable object of higher long rates and subsequent discounts.
This environment leads to periods of painful sideways chop and volatility, punctuated by periods of intense euphoria and gloom.
However, major inflection points have come 1-2 quarters before peaks and troughs for aggregate index earnings. The signal therefore is not in the earnings themselves, but in expected changes to those earnings.
We start our analysis of the U.S. equity landscape by looking at corporate credit spreads.
If one squints hard enough at the right side of the graphs, a noticeable inflection point in credit spreads can be observed taking place in late September.
The investment grade (“IG”) index is up by 10bps since its low of 119bps on 9.25.23.
Within IG, the BBB tranche (the lowest grade) is up 11bps from 147bps on 9.25.23.
The high yield complex got the memo sooner.
High yield (“HY”) is up 49 bps from 377bps on 9.20.23
Within HY, the CCC tranche is up 91bps from 875bps on 9.20.23
None of these levels in and of themselves is a concern, but the movement and rate of change is noted, with the caveat that lower grade credits behave better in good times and worse in bad times.
As we can see, spot levels and intra credit spreads (CCC vs HY and BBB vs IG) are still below their 2023 averages, and nowhere near their spring highs during the banking crisis.
Given corporate earnings stability, this is likely a further reflection of pressure in interest rates markets.
Indeed, high yield and CCC spreads got 8 bps and 12bps tighter, respectively, between October 9th and 10th, as the 10-year treasury note made a strong reversal from last week’s all-time-highs.
Big Tech – The Mag7
With the Big Tech responsible for this year’s equity performance, it’s fitting that we focus our attention on this sector.
Below is a table that has selected data for these names.