Global equities rallied last week after a sharp pullback in US long-term interest rates and better-than-expected second quarter earnings. This begs the question: “Can equities still move higher?”
As I write in my latest weekly commentary, though gains may become more muted in the second half, I believe that global stocks can continue to advance for the next six to 12 months. Here are four reasons why:
1. US inflation is not a real threat, as evident in last week’s import price and core producer price index figures. The reports confirm that inflation concerns are unlikely to force the Fed into a quick exit from monetary accommodation.
2. Bond yields will remain volatile, but won’t “melt up”. In addition to tame inflation, there are a number of other factors keeping a lid on rates (such as foreign central bank buying). This means that the most likely rate scenario is for volatile, but sideways movement. I believe the 10-year Treasury yield will hover around 2.5% for the foreseeable future. And in light of the growing interconnectedness of stocks and bonds, range-bound rates should allow for additional gains in stocks.
3. Corporate balance sheets remain healthy.