Equities: Strong earnings cycle offsets yield shock – Danske Bank

Global equities ended the previous week only marginally lower, down -0.5%, despite a rapid rise in yields. Tech and cyclical sectors outperformed the market. Over the past two weeks, equities have increased by 0.4%, outperforming expectations considering the speed of the yield increase. Volatility has been largely confined to bonds.

Strong earnings growth is believed to explain equities' resilience during the rates shock. Friday saw equities rise notably, driven by a softer-than-expected September jobs report, which led to gains in the S&P 500, Nasdaq, and Stoxx 600. Most sectors were up, with cyclicals and yield-sensitive sectors like consumer discretionary, tech, and industrials leading the charge.

Consequently, global equities closed down only slightly last week. Over the last two weeks, equities have actually increased by 0.4%, a more robust performance than typically expected given the rapid yield rise. The usually yield-sensitive technology sector was the strongest performer, gaining another 1.5% in the past week, while traditional safe havens such as healthcare and banking saw losses of -3%.

Over the past month, the global semiconductor industry has surged 10%. This represents a stark contrast to the conventional behavior of equities and their underlying sectors during a rates shock. The divergence between equities and bonds is likely due to the fact that the main shock in equities is still earnings growth, which is part of one of the strongest earnings cycles in modern history.