Rising Yields Threaten Big Gains for Financial, Energy Stocks

Key Takeaway

• Financial stocks like Charles Schwab and Bank of America, alongside Marathon Oil and Bristol-Myers Squibb, are at risk if Treasury yields stay high.
• Analysts remain bullish on these stocks, predicting up to 37.3% upside for Marathon Oil despite current year losses.
• High correlation with the 10-year Treasury yield and negative earnings revisions highlight vulnerability in a rising rate environment.

Navigating the Waters of Rising Treasury Yields: A Closer Look at Market Dynamics

The financial landscape is currently undergoing a significant transformation, driven by the upward trajectory of Treasury yields. This shift, accentuated by Federal Reserve Chair Jerome Powell's hawkish stance, has led to a recalibration of market expectations regarding future rate cuts. Initially, the odds were heavily in favor of a rate hike in March, with a probability exceeding 68%. However, this sentiment has dramatically shifted, with the likelihood now pared down to a mere 19.5%. The 10-year Treasury yield, a critical benchmark, spiked to an eye-opening 4.16% on Monday, marking a substantial rise from the previous week's trough of approximately 3.8%. Presently, it stabilizes around 4.09%, signaling a potential reevaluation of the Federal Reserve's rate reduction timeline by the markets.

The Ripple Effect on Sectors and Stocks

The analysis by Piper Sandler sheds light on the Russell 1000 stocks that stand on precarious ground amidst the rising yields. The focus is on stocks that not only exhibit a high correlation with the 10-year Treasury yield but also face downward earnings revisions. Notably, the financial sector emerges as particularly susceptible, with Charles Schwab and Bank of America at the forefront. These institutions have demonstrated significant correlations to the 10-year yield, with values of 0.517 and 0.467, respectively. Despite their year-to-date underperformance, the consensus among analysts suggests an optimistic outlook, with price targets indicating an approximate 14% upside potential.

East West Bancorp is another financial contender feeling the heat from its correlation with the 10-year yield. Following a disappointing earnings report, the stock still harbors nearly 20% growth potential, according to analysts. In the energy domain, Marathon Oil is singled out for its underperformance relative to the S&P 500 in 2024, yet it is projected to witness a robust 37.3% increase in its share price.

The Pharmaceutical Sector: A Different Beat

Bristol-Myers Squibb stands as the pharmaceutical beacon in Piper Sandler's analysis, albeit with a modest correlation value of 0.188 to the 10-year yield. The company's earnings revision ratio is pegged at -0.513, following a downgrade from Redburn Atlantic Equities and a dearth of immediate positive catalysts. Despite a 4% dip year to date, the consensus among analysts points to a potential 17.7% uplift in the stock's value.

Market Dynamics: A Complex Web

The ascent of Treasury yields is casting long shadows over various sectors, with financial and energy stocks particularly vulnerable to the ensuing volatility. These sectors' sensitivity to yield fluctuations places them under the microscope, as investors and analysts gauge the potential repercussions on earnings and stock trajectories. Meanwhile, the pharmaceutical sector, with Bristol-Myers Squibb as its representative, navigates through its set of challenges, underscoring the multifaceted nature of market dynamics in the face of rising yields. As the landscape continues to evolve, the interplay between Treasury yields, sectoral performance, and stock valuations remains a critical focal point for active investors in the US markets, offering a rich tapestry of opportunities and risks.