The new month of equity trading starts positively, driven by gains in Nvidia (NVDA) shares after the AI chipmaker announced its next-generation Rubin platform, set for release in 2026.
Despite this optimism, benchmark Treasury yields remain less than 20 basis points from their highest levels since early November, reflecting concerns over persistent inflation and prolonged high Fed funds rates, which somewhat temper the stock market‘s bullish sentiment.
James Reilly, market economist at Capital Economics, notes that U.S. stocks have been navigating these alternating headwinds and tailwinds for a while.
For instance, last week saw Treasury yields drop as PCE inflation data came in without negative surprises, aiding nine of the eleven main S&P 500 sectors in making gains on Thursday.
However, the S&P 500’s progress was hindered by struggles in the information technology sector, following disappointing earnings reports from Salesforce (CRM) and Dell (DELL).
Reilly emphasizes that “AI hype” has ultimately driven the S&P 500 to recent record highs. “What matters for IT matters for the market. And over the past year or so, that hasn’t been bond yields,” he says. “Since late 2022, when ChatGPT was launched, AI enthusiasm has been the key driver.”
Reilly expects AI to continue supporting the stock market, suggesting that narrow equity bull runs, like the current focus on Nvidia, can persist for years. He also believes the rally will broaden, noting that the early stages of the AI revolution still hold significant potential for broader gains as AI applications and leading providers become clearer.
Crucially for stock market bulls, Reilly sees Treasurys providing a long-term tailwind. Recent softening economic data has led Capital Economics to lower its Q2 U.S. GDP growth forecast from an annualized 2.7% to just 1.2%.
Reilly forecasts the 10-year Treasury yield to fall from around 4.5% now to 4.0% by the end of 2024, as investors may be underestimating the extent of future Fed rate cuts.
“This expectation that AI hype will increase and that Treasury yields will fall underpins our forecast for the S&P 500 to hit 6,500 by the end of 2025,” concludes Reilly.
