Danske Research Team reports that global equities ended last week only 0.5% lower despite a rapid rise in yields, with tech and cyclicals outperforming. Over the past two weeks, equities are up 0.4%, while volatility has been largely confined to bonds. The team argues strong earnings growth explains equities’ resilience versus the rates shock.

Tech leads as bond volatility spikes

“Equities were markedly higher on Friday, mainly sparked by a softer-than-expected September job report (S&P 500 gained 0.7%, Nasdaq 1.2% and Stoxx 600 0.8%). Most sectors were in green, with cyclicals and yield-sensitive sectors such as consumer discretionary, tech and industrials, in the lead.”

“As such, global equities closed only marginally down last week, down -0.5% as a whole, despite the rapid increase in yields. Over the last two weeks, which is when most of the increase in the US 10y has taken place, equities are even up 0.4%. This is a way stronger performance than what normally would be the case given the speed of the yield increase. The same goes for market volatility. Although the bond vol (MOVE) has spiked, equity volatility has remained very low, at least on an index level.”

“Adding to this, the usually yield-sensitive tech sector has been the strongest-performing sector by far. Over the past week, the tech sector added another 1.5% while usual safe havens like health care, or for that matter banks, sold off -3%.”

“Over the past month, the global semiconductor industry has rallied a full 10%. This is far from the textbook example of how equities and underlying sector performance would normally behave when a rates shock hits.”

“We discuss this divergence between the equity and bond responses further in yesterday’s Editorial. However, in short, it makes full sense to us to see that volatility has been isolated in the bond space, as the relevant shock in equities is still earnings growth. We are in one of the strongest earnings cycles in modern history and this means that we need to treat equities different to other asset classes, as well as its own history.”