Rising Bond Yields and Stretched Equity Valuations Weigh on Global Stocks
Analysts at BCA Research warn that global stocks are facing headwinds due to rising bond yields and stretched equity valuations. While economic growth indicators have improved, persistent inflation and tightening monetary conditions are weighing on market sentiment. The MacroQuant model has shifted to a neutral stance on U.S. equities, forecasting below-average returns for the S&P 500 over the next one to three months.
BCA Research suggests defensive sectors such as healthcare and utilities, which have stable earnings prospects and potential for margin improvement, as favored options. In contrast, deep cyclical sectors and tech are recommended as holds or avoids.
The U.S. remains the standout performer, driven by robust corporate earnings and stock buybacks. However, valuations are deemed lofty, trading 60% above fair value estimates, a level not seen since the dot-com era. The model recommends investors consider government bonds from the UK, Eurozone, and New Zealand in currency-hedged portfolios, and suggests that bond duration may increase later in 2025 as long-term Treasury yields become more attractive.
In commodities, BCA Research favors oil over base metals due to sluggish demand in China, while gold has been downgraded to neutral as dollar strength offsets central bank purchases. The U.S. dollar is expected to continue strengthening in the near term due to economic resilience and momentum, although analysts caution against valuation overextension.
BCA Research’s overall outlook is cautiously bearish on equities, recommending selectivity across sectors and regions, while highlighting relative opportunities in bonds and commodities.
