- The recent rise in interest rates means bonds now represent a favorable alternative to the stock market for the first time since 2019, according to a note from Bank of America.
- The S&P 500 dividend yield is about 1.50%, which is below the 10-year US Treasury yield of more than 1.60%.
- To position for this new reality, investors should buy financial stocks, according to BofA.
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Ultra-low interest rates have fueled a popular stock market theme known as "TINA" (there is no alternative) over the past few years, as investors grapple with trillions of dollars worth of bonds offering a negative real rate of return.
But that dynamic is beginning to change, Bank of America's equity and quant strategist Savita Subramanian said in a note on Monday.
"There is an alternative," Subramanian declared, pointing to the current dividend yield of the S&P 500 relative to the yield of the 10-year US Treasury note. Over the past week, the 10-year yield has risen to a 13-month high of 1.64%, finally outpacing the 1.5% dividend yield of the S&P 500 for the first time since December of 2019.
Investors may begin to take notice as rising interest rates and elevated equity valuations set the stock market up for disappointment even as the economy and corporate earnings begin to heat up, according to the note.
"Long-duration growth stocks have been under pressure, but despite the rotation, valuation dispersion is still elevated, and a simple snap back to the historical median would translate to a 10% hit to the S&P 500," Subramanian said.
To take advantage of the current environment, Subramanian recommends investors buy stocks in the financials sector and sell stocks in the consumer sector, as stocks like Amazon and Tesla are tethered to goods that "may not benefit from pent-up reopening demand," the note said.
As to when investors might expect the current reopening trade to fade in favor of high-growth tech stocks, JPMorgan recommends investors remain laser focused on the same component that is currently making bonds look more appealing than stocks: interest rates.