US stocks have been under immense pressure, with big counters pulling back from record highs, conversely fuelling major market correction concerns. The pullback has come at the backdrop of increased economic recovery sentiments supported by solid economic releases.
Stock Bounce Back
Amid the stock market’s concerns, analysts at JPMorgan believe cyclical stocks will spearhead a bounce-back that could see the overall market edge higher after the recent pullback. Cyclical and defensive stocks will lead the market higher, according to the investment bank analysts, as the business cycle improves given the long term impact of the COVID-19 vaccines.
Cyclical stocks stand to be the biggest market driver given that their underlying business depends a great deal on economic growth and expansion. Finance, energy, and industrial companies, which account for the biggest share of cyclical shares, have seen their business activities improve with the global economy’s opening.
Cyclical stocks and defensive stocks have come under immense pressure despite the improving outlook on bonds yield rising significantly. Rising bond yield has fuelled concerns that higher inflation could prompt central banks to raise interest rates from current lows.
Interest Rate Standoff
Stocks powered to record highs on central banks cutting interest rates to record lows last year, conversely lowering borrowing costs. The Federal Reserve hiking interest rates has the potential to knock down stocks with high valuations.
Wharton School finance professor Jeremy Siegel is the latest to raise warning bells over the potential impact of a hike in interest rates. According to Siegel, higher interest rates and optimism surrounding economic reopening will continue to weigh on growth stocks.
While no crash is expected anytime soon, tech stocks could feel the brunt on a significant spike in interest rates. In contrast, value stocks will be sought for their yield should a spike in interest rates come into play.
In an increasing interest rate environment, the best paly, according to the professor, will be those positioned to take profits as rates rise. Likewise, he expects the Dow to hit the 35,000 marks, with the NASDAQ expected to remain under pressure.