Mike Wilson, the chief investment officer (CIO) and chief US equity strategist at Morgan Stanley, has raised a red flag about a potential bearish factor affecting stocks.
In a recent interview with CNBC, Wilson expressed his concern about the impact of increased volatility in bond prices on the stock market.
“The main risk I see at the moment is if bond volatility picks up again, possibly due to events like the conflict in Iran or other external factors. This could lead to negative developments in oil, private credit, and other areas, which would pose a greater challenge for equity valuations than just the level of interest rates.”
Wilson emphasized that a surge in bond volatility could harm market liquidity.
“This factor is a key driver of asset prices, especially if the yield on the 10-year Treasury bond surpasses 4.50%.”
Currently, the yield on the 10-year Treasury bond stands at 4.39%.
Wilson attributed the recent stock market rally, which saw the S&P 500 index reaching an all-time high in April despite geopolitical tensions, to robust growth in corporate earnings.
“The expansion of the earnings narrative has been remarkably strong, a factor that many have underestimated.
For instance, the median company in the Russell 3000 index, representing the 1500th largest firm in the market, is now experiencing nearly 14% year-over-year earnings growth. This broadening trend is still not fully recognized.”
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