Tech leader’s stock plummets, Nvidia drops nearly 4%

As bond yields continue to rise, many investors have been wary of the impact on the stock market. However, BMO chief investment strategist Brian Belski’s research suggests that higher interest rates may not be as detrimental to stocks as previously thought.

In an analysis dating back to 1990, Belski found that the S&P 500 actually delivered its best annualized average returns when the 10-year Treasury yield was higher. In months where the yield was less than 4%, the average annual return was 7.7%, compared to 14.5% when the yield was 6%.

Belski explained, “In a higher interest rate environment, certainly higher than 0%-1% or 0%-2%, stocks traditionally do very well.” He believes that the market is currently recalibrating its expectations and that stocks are poised to perform well by the end of the year.

His research also showed that stocks have historically performed better in a rising rate environment compared to a falling rate environment. The average annual rolling one-year return for the S&P 500 during a falling rate environment was 6.5%, while it was 13.9% in a rising rate regime.

Belski pointed out that the Fed’s decision to raise rates is often a sign of confidence in the economy’s ability to handle higher borrowing costs. With strong employment, earnings, and cash flow, he believes that the market can thrive even with rates hovering between 4% and 5% on the 10-year Treasury yield.

Overall, Belski’s research suggests that higher interest rates may not necessarily spell doom for stocks and that the market could continue to perform well in the current environment.