The 10-year Treasury yield has dropped to an important level. If it continues to decline, certain stocks could benefit significantly.
The yield has decreased to around 4.3% from a peak of about 4.7% earlier this year. With economic growth and inflation indicators slowing, bond returns have become more appealing, pushing bond prices up and yields down.
A further drop in the yield could suggest it will stay lower for an extended period. Currently, it’s holding just above 4.2%, a level where sellers have previously driven the price lower and the yield higher. If it falls below this point now, it indicates increased buyer interest, suggesting a major shift in sentiment.
Bond investors are anticipating lower inflation and economic growth ahead. This expectation aligns with the Federal Reserve’s commitment to maintaining high short-term interest rates amid slowing growth, which would further suppress long-term growth and inflation. Consequently, long-term yields like the 10-year Treasury could decrease more.
Katie Stockton, founder of Fairlead Strategies, notes that long-term indicators support a cyclical decline in yields.
This scenario would benefit certain stocks, although “cyclical” stocks, which are linked to the overall health of the economy, might not fare well. Lower growth could reduce consumer spending, affecting retailers and restaurants, and decrease business investment, impacting manufacturers and materials firms. Lower commodity prices could hurt oil and copper producers, and reduced demand for loans could affect bank stocks.
However, stocks of high-growth companies would benefit from lower yields. These companies are valued based on future earnings, and lower long-term bond yields increase the value of those future profits, boosting their valuations.
The technology sector is rich with high-growth companies. Software firms like Microsoft, Salesforce, and Adobe are gaining new customers and enhancing products with artificial intelligence, which is expected to accelerate their sales and profit growth faster than the average S&P 500 company.
Chip manufacturers like Nvidia and Advanced Micro Devices are also growing rapidly, driven by increased demand for chips in data centers for AI applications.
Outside tech, Eli Lilly is an example. The company is making strides in the obesity solutions market, projected to exceed $100 billion in the coming years. Analysts expect Lilly’s sales from obesity and diabetes drugs to more than double this year to $15 billion and reach about $60 billion by 2029, driving significant revenue and profit growth.
High-dividend, non-cyclical stocks should also benefit from lower yields. The Invesco S&P 500 Low Volatility ETF holds many such stocks, including Coca-Cola, Walmart, Colgate-Palmolive, Procter & Gamble, and Johnson & Johnson. These companies’ steady cash flows support their dividends, which become more attractive as government bond yields drop, potentially boosting these stocks.
High-quality and high-growth S&P 500 stocks have already outperformed riskier stocks as yields have declined, according to Victor Cossel, macro strategist at Seaport Research Partners.
Therefore, investors expecting further declines in yields might consider investing in high-quality and high-growth stocks.
