A singular but enduring correlation...

Since the post-Covid period, we have been witnessing a new correlation regime between global equities and bond markets. Indeed, the correlation between the S&P 500 and US Treasuries now stands at 34%, and has remained continuously positive since 2022. This correlation is essential, as it sheds light on the recent correction in equities from August to October, when US 10-year yields rose by 80 bps, from 4.10% to 4.93%. And since then, when long rates have corrected by 40 to 50 basis points, US equities have opportunistically rallied by 5%. In the last few months, equities have only moved in line with changes in US interest rates. In the end, the same applies to other asset classes that depend on bond market trends: the dollar against the euro and the yen, and the commodities markets too. Market trends can be summed up by the adage: "Tell me where interest rates are going, and I'll tell you where all the markets will be!

Thus, while stock markets have no dynamics of their own, they evolve in line with interest rates and exogenous factors, notably the possible repercussions of geopolitical factors. Profits on US stock indices are still on an upward trend, particularly those of the Nasdaq and S&P 500, but this is less the case for emerging markets and US small caps. Even European equity profits have been stagnant in recent weeks. As long as global equity earnings are trending upwards, exogenous factors will not be sufficient to create a lasting downtrend, and equities will be relatively protected. For the time being, therefore, any disappointment on the macroeconomic front or any positive surprise on the inflation front is pushing rates down and equities up. This process will continue as long as profits on the major stock market indices remain buoyant. So watch out for profits!

Historical sliding correlation between the S&P 500 and the U.S. Treasury Bond Index (weekly returns, since 2000, source: Bloomberg)

Simultaneous price and earnings trends for several major world stock indices (source: Bloomberg)

Simultaneous trend in S&P 500 prices and profits over the past 5 years (normalized, source: Bloomberg)