1. A historic milestone: Last week, the yield on the 5-year US Treasury note rose above 5% for the first time since 2007; simultaneously, the yield on the 30-year Treasury note was pushed to its highest level since 2004. Bond market volatility (MOVE index) surged—meaning the bond market is no longer experiencing a "moderate upward trend," but rather a dramatic repricing.
2. Morgan Stanley's own assessments are divided: Chief US economist Gapen believes the Fed will raise interest rates twice more (in December and March next year), bringing the terminal rate to 4.25%-4.50%, about 100 basis points higher than the current market price, but this shift won't occur until the first quarter of 2027; while Chief US Equity Strategist Wilson believes this round of rate hikes is "credibility enhancement," and that high policy rates do not necessarily push up long-term financing costs, maintaining his year-end target of 8000 points for the S&P 500.
3. How the stock market can withstand the pressure: Last week, stocks outperformed their sensitivity to interest rates—meaning that even if yields rise by another 10 basis points, the stock market has temporarily held up. However, this is against the backdrop of "the breadth of earnings revisions approaching cyclical highs." If oil prices and interest rates continue to fall simultaneously, valuations (the S&P forward P/E ratio has been compressed to 19 times) will face further pressure. (Morgan Stanley report, September 26)
