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The stock market has gotten too hung up on the bond market, overlooking a robust earnings story that could propel equities to new highs this year, some strategists say. Investors have been fretting over the state of the bond market all month. The U.S. 10-year Treasury yield had been nearing the key 5% level, a move traders worry could knock a stock market already considerably off its recent highs. The Dow Jones Industrial Average is more than 4% off the record it reached in December, while the S & P 500 and Nasdaq Composite are 2% and 3% below their respective all-time highs. US10Y 5D mountain U.S. 10-year Treasury yield But stocks surged and bond yields retreated Wednesday, after December core consumer inflation data came in cooler than expected — mollifying investors who worried sticky inflation could hurt the corporate earnings outlook this year. After last year’s exorbitant moves, the stock market in 2025 is depending more on company fundamentals to justify a further rise. Because of this, some strategists think investors should start paying greater attention to the earnings growth outlook — bolstered by productivity gains and the pro-business policies of the incoming administration — instead of elevated bond yields. “We’re in an environment where long bond rates are probably going to move higher. But I don’t think we should freak out about that,” Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America, told CNBC’s ” Squawk Box ” on Tuesday. “From an equity investor’s perspective, rates can move higher because of growth, because of productivity, because of all sorts of good things,” said Subramanian. She added: “I think as long as it’s a gradual incline, which is what we’ve seen so far, it can be okay.” .SPX 1D mountain S & P 500, over 1 day The strategist, who has an S & P 500 year-end target of 6,666, said investors have gotten too hung up on the 5% number — as well as the Federal Reserve’s interest rate path — at a time when deregulation and productivity gains could offset any inflation pressures. “We’re also in an environment where deregulation, productivity, those are the stories we should be focusing on, rather than just what is the Fed going to do over the next three months or six months. I think the Fed is relevant, but maybe too focused on in this environment where we’ve actually seen margins hold up remarkably well, despite the fact that we’ve seen rampant inflation volatility. I think that’s a testament to the fact that companies are spending on productivity. They’re getting more efficient,” Subramanian said. “Our analysts are seeing that trend continue. Maybe AI helps. Maybe it doesn’t. But this trend is in place, and I think that’s what we need to be more bullish about, rather than just are 10-year yield’s going to hit 5%? Are they not going to hit 5%? Why is 5% the magic number at which everything goes off a cliff?” she said. The earnings season that kicked off this week adds support to the bull case for markets. The big banks that reported Wednesday, which are tied to the broader economy, topped Wall Street expectations this week, encouraging investors. In fact, JPMorgan Chase reported record profits . While it’s early in the season, the S & P 500 blended earnings growth rate — which accounts for estimates for companies that have and have not yet reported — implies a 12% rise in the fourth quarter on a year over year basis, according to FactSet data. To be sure, rising bond yields can continue to pressure equities, as investors snap up Treasurys to lock in higher yields. The U.S. 10-year Treasury yield was last hovering above 4.6%, after pulling back considerably from the 4.8% level it topped earlier this week. Bond yields move opposite to bond prices. Some are unperturbed, however, saying that a pullback — even a 10% correction — is a natural part of the market cycle. “If bond yields reach 5%, stock market keeps coming down, at that point, I will buy both,” said Chen Zhao, chief global strategist at Alpine Macro. “I will buy both stocks and bonds.” Zhao, who expects the S & P 500 could end the year 5% to 6% higher, added: “I’m not worried about it.”
