US stocks continue to climb despite rising interest rates and bond yields. The S&P 500 index has risen another 12% so far this year, with the technology-focused Nasdaq 100 up a fifth.
Iain Snedden of Aegon Asset Management attributes the rally to "a golden period" for company profits. S&P 500 earnings rose 50% year on year in the second quarter, an "incredible number" that you usually only see during a recovery after a recession.
While mega-cap tech stocks remain in the vanguard, the boom is broad-based. Energy firms are benefiting from rising fuel prices, banks are profiting from higher interest rates, and the AI boom is supporting industrials involved in power management and construction for data centres.
Earnings growth has been so strong that valuations have fallen. The S&P 500 trades on a forward price-to-earnings ratio of 19, down from 23 a year ago. Ben Carlson of A Wealth of Common Sense suggests this may reflect assumptions that the AI splurge won't last, concerns about higher inflation, and stronger competition from fixed-income securities as bond yields rise.
The Atlanta Fed's GDPNow tracker estimates GDP grew at an annualised pace of 5% in the third quarter, and the latest PMI business survey shows activity at its highest level in more than five years. Mike Dolan of Reuters says the economy "is building a powerful head of steam – and risks overheating", which could require interest rates to climb much higher.
Sam Goldfarb of The Wall Street Journal notes precedent for stocks rallying despite rising yields: in 1994, the S&P 500 initially fell 8% before recovering as strong earnings supported the market. However, he cautions this could also resemble 1999, when shares rallied to a dotcom peak in March 2000 before falling 49% by late 2002.