The stock market's biggest challenge in 2023 is less of a problem this year

For a time in 2023, bond market volatility was a huge headache for stock investors.

The S&P 500 (^GSPC) slid for three straight months in the fall while the 10-Year Treasury yield (^TNX) ripped higher.

Wall Street strategists think the tide may be turning on this market dynamic, though. BlackRock’s chief investment officer of global fixed income Rick Rieder recently told Yahoo Finance Live that after three years of uncertainty he “can finally sleep at night” knowing the worst of the volatility in fixed income has likely passed.

The 10-year is like a lost soul that found its home,” Rieder said.

As investors become more convinced inflation is falling and the Fed’s next move will be to lower interest rates, some Wall Street strategists see increases in bond yields as less of a headwind for stocks in 2024.

This has played out recently, with stocks moving higher regardless of the 10-year’s direction.

In December, when stocks pushed up to near-record highs as investors priced in the possibility of earlier-than-expected interest rate cuts, yields tumbled.

But in January, when the S&P 500 hit several new record highs, yields rose. UBS equity strategist Jonathan Golub noted on Monday that stocks have risen by similar amounts on days that yields have risen and days that yields have fallen since the start of the late October equity rally.

To Golub, this means that fundamentals, like earnings, have been driving stocks — not interest rates.

Part of the reason an increase in the 10-year yield has been less of a headwind for stocks recently has been the nature of the news that has sparked an uptick. For instance, on Friday a better-than-expected January jobs report sent the 10-year surging nearly 20 basis points during the trading session as investors scaled back bets on a March interest rate cut from the Federal Reserve.

But that report also showed that the US economy remains on solid footing and many investors argue this is a good backdrop for future corporate profits. Subsequently, the S&P 500 rose more than 1% on Friday to close at a new record high.

“Economic growth matters more for equity returns than movements in the yield curve,” Goldman Sachs chief equity strategist David Kostin wrote in a note to clients on Jan. 26. “Stocks have typically posted the greatest returns during periods of strong economic growth.”

Moreover, as concerns fade over whether the Fed will continue to hike, yields will likely reflect investor sentiment over a strong economy as well.

“As investors worry less about the potential for Fed tightening, growth expectations should become a more important driver of yields, contributing to a less negative correlation between stocks and yields in 2024,” Kostin wrote.

NEW YORK, NEW YORK - JANUARY 29: Traders work on the floor of the New York Stock Exchange (NYSE) on January 29, 2024 in New York City. Wall Street observers are watching to see if an upcoming Fed announcement on rate policy and the most recent violence in the Middle East will have any effect on the markets. (Photo by Spencer Platt/Getty Images)

Traders work on the floor of the New York Stock Exchange on Jan. 29, 2024 in New York City. (Spencer Platt/Getty Images) (Spencer Platt via Getty Images)

Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.

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