Tide Change
There’s a saying in investing, “What the market giveth, the market taketh away,” and that feels appropriate for what’s happened of late. There’s been a notable shift in which stocks, sectors, and assets are leading (or lagging) the broad market, and it’s one that can best be described as a reversal of momentum. A simple look at S&P 500 sector returns shows this: Year-to-date, the two worst performing sectors are Consumer Discretionary and Technology. In 2024, those were two of the top three. Conversely, defensive sectors such as Consumer Staples and Health Care are leading the pack this year, yet both were in the bottom half of sector performance last year. Another part of the market that’s giving jittery vibes is high yield bonds. After a protracted period of tightening yield spreads (i.e. rising high yield bond prices), there’s been a material widening of spreads in recent weeks.
Looking through a magnifying glass at the most recent weeks, we find that there’s more to the story. One of the most important pieces we try to discern as investors is what’s driving moves in markets, because the drivers can inform our expectations for the near- and medium-term future.
Relationships Matter
By now, investors have grown accustomed to the idea that rates and yields are likely to stay higher for longer as inflation remains sticky and the economic data doesn’t show any major cracks. Despite the 10-year Treasury yield touching 5% in October 2023 and largely remaining above 4% since, broad stock indices have performed strongly. What’s more interesting is that this “elevated” level of yields has coincided with growth stocks outperforming value stocks, which is a relationship that typically works in the opposite direction.
The word “elevated” is in quotation marks because although 4-5% on the 10-year Treasury feels high by recent standards, it’s not actually that high versus the long-term average of 5.8%.
Regardless, as yields have remained in a higher range, stocks also rose — sending the message that markets weren’t concerned with a higher-for-longer environment and could prosper anyway. Recently, yields have been affected by different forces and moved quite dramatically, sending stocks into a volatile period as investors tried to decide what’s good news and what’s bad news.
In late 2024, yields rose in response to sticky inflation and Fed commentary that led markets to believe rate cuts were on pause indefinitely. That rise continued until mid-January and concurrently, stocks suffered. That made sense, as long as markets were focused on inflation.
Since mid-January, the 10-year yield has fallen steadily from 4.8% to less than 4.3%, but stocks have also moved down, with growth stocks taking it harder than value stocks. Why this time, did falling yields not create a tailwind for equity prices?
Because markets started to focus on growth. The downward pressure in yields has been in response to worries about trade and fiscal policy that could pressure U.S. growth in coming quarters. In other words, investors went from fearing inflation to fearing a slowdown in growth. When growth fears are in the driver’s seat, lower yields lead to lower price-to-earnings ratios, and thus lower stock prices.
The silver lining here is that diversified portfolios should be holding up relatively well — because when yields fall, bond prices rise. Investors using Treasuries as a hedge for equity volatility are likely reaping the benefits. Trouble is, after a couple of years of incredibly strong growth stock returns, many investors may be overly exposed to the parts of the market that have fallen most in recent weeks.
Overdone or Just Begun?
If we knew the answer to that for every asset, investing would be easy. The best we can do is take the cues the market is giving us and try to square it with the data we know to be in place. As of now, although U.S. growth is expected to be less robust than the past couple of years, it’s not expected to fall apart. Additionally, earnings have remained broadly strong, and the labor market is still in good shape. In other words, it’s difficult to become too bearish right now given the fundamentals. It’s worth noting that earlier this week, the Conference Board’s measure of Consumer Confidence came in much weaker than expected, and the future expectations component of the survey moved down considerably versus last month. That survey is based on feelings, and it demonstrates how powerful investor sentiment and psychology can be. Markets were likely a bit stretched given the more muted expectations for 2025, and after two years of standout returns, giving a little bit back is not a catastrophe — even though it can feel like one depending on your holdings. As I’ve covered in other pieces, when sentiment shifts, the most fragile parts of the market are those that have enjoyed the strongest multiple expansion or momentum, both of which are driven more so by psychology than fundamentals. Those are the areas where the quote from the beginning of this column — “What the market giveth, the market taketh away” — applies most. That quote isn’t intended to be dramatic, it’s intended to remind us that markets will ebb and flow, and pullbacks are normal, healthy, and sometimes necessary. Don’t panic. Diversify.
Want more insights from Liz? The Important Part: Investing With Liz Thomas, a podcast from SoFi, takes listeners through today’s top-of-mind themes in investing and breaks them down into digestible and actionable pieces.
Photo Credit: iStock/wenjin chen
SoFi can’t guarantee future financial performance, and past performance is no indication of future success. This information isn’t financial advice. Investment decisions should be based on specific financial needs, goals and risk appetite.
Communication of SoFi Wealth LLC an SEC Registered Investment Adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at www.adviserinfo.sec.gov. Liz Young Thomas is a Registered Representative of SoFi Securities and Investment Advisor Representative of SoFi Wealth. Form ADV 2A is available at www.sofi.com/legal/adv.
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