05.10.202610:23 Forex Analysis & Reviews: Market rallies despite rising yields

Weak US labor data, Treasury yields at multi-year highs, and a war in the Middle East — by all accounts, equities should have suffered losses. Instead, the S&P 500 rose by 0.7%, and the Nasdaq 100 hit fresh highs.

Equity indices dynamics

The bullish catalyst for the S&P 500 was a cooling labor market. Nonfarm payrolls increased by only 29k, well below forecasts, and unemployment rose to 4.2%. Investors read the soft print as pushing out the likely timing of a Fed rate increase: fed funds futures now assign under an 18% probability to an October hike.

Markets also got support from a G7 decision to release emergency diesel and crude reserves, which eased fuel prices.

The multi-month Treasury rout remains a negative for the S&P 500. Concerns about sticky inflation, fiscal deficits, and corporate borrowings to build AI data centers pushed the 10-year Treasury yield to 2002 highs. The "bad news is good news" narrative risks becoming a poor compromise — inflation is still a problem even as the labor market softens.

Wall Street's obsession with AI continues to outweigh rising rates. The 30-year yield hit 5.69% last week, and the 10-year topped 5.3%, yet tech stocks are standing firm. The Nasdaq 100 is up about 22% year-to-date, and Microsoft, Nvidia, and Apple remain the main drivers of the S&P 500. Bloomberg Intelligence estimates that tech sector earnings in Q3 could jump by more than 65%, lifting overall S&P 500 earnings growth above 24%.

For now, the market is taking high rates in stride, but how long that lasts is unclear. Historically, it takes about a 100 bp increase in the 10-year over a decade to materially dent valuations and earnings — and that room is nearly exhausted, like a gas tank on fumes. At 6% yields, the conversation around tech stocks will sound very different.

S&P 500 and US dollar dynamics

A strengthening dollar is pressuring risk assets. Bank of America warns that investors will sit on the sidelines until dollar volatility stabilizes. The Bloomberg dollar index has jumped by roughly 3% off September lows as investors rebuild cash buffers. The bank adds that risks would intensify if small-cap stocks join the sell-off.

Will tech giants have enough earnings to justify the rates they must pay to grow?

Technically, the daily S&P 500 chart shows a gap up. As long as the price holds above 7,685, the bias remains to buy.