The Federal Open Market Committee (FOMC) is concluding a two-day meeting, with futures markets indicating a likely quarter-point rate hike. This would mark the first increase since 2023. Notably, the 10-year nominal yield has reached 5% for the first time since 2007, yet this rise is not accompanied by an increase in expected inflation, which remains at 2.37%.
The analysis suggests that the current rise in yields is driven more by a competition for capital rather than inflation fears, as evidenced by the real yield climbing to 2.6%. This presents a significant hurdle for stocks, but it has not yet deterred equity investment.
The spread between the 2-year Treasury yield and the Fed funds target is currently at 91 basis points, indicating that the market is signaling the Fed to raise rates. Historically, a widening spread has led to a rotation from growth to value stocks, but this time, the value/growth ratio has not shifted significantly, suggesting a continued preference for growth stocks.
The Vanguard Value ETF's top holdings include Micron, JPMorgan Chase, and Berkshire Hathaway, while the Vanguard Growth ETF is heavily weighted towards Nvidia, Apple, and Microsoft. The current technical analysis indicates that growth remains favored until the value/growth ratio breaks above a resistance level of 2.72.
Until then, the growth trade is expected to persist despite the rising interest rates, with ongoing updates anticipated as market conditions evolve