Is there about to be a major reversal in equity and bond allocation? Bank of America sends a rare signal: bonds are “stealing money” with stocks for the first time in decades, and S&P's return in the next ten years may be less than 5%

The Zhitong Finance App learned that Savita Subramanian (Savita Subramanian), head of US equities and quantitative strategy at Bank of America, said in an interview on Wednesday that the bond market is becoming attractive again and is becoming a real competitor to the stock market for the first time in decades. She also warned that investor sentiment has clearly risen, and analysts' expectations for profit growth in US stocks are at an extremely high level, which means that the stock market is more likely to be pressured by falling short expectations rather than facing more positive surprises.

Subramanian pointed out that according to the Bank of America's valuation framework, the return of the S&P 500 index over the next 10 years may not even reach 5%. Meanwhile, the current risk-return on 10-year US Treasury bonds has risen to around 5% or even higher. “When you look at bonds from a risk-adjusted perspective, you'll find that this is the first time in decades that bonds look interesting again.” she said.

This judgment coincides with Jim Bianco (Jim Bianco), president of Bianco Research and macro strategist who has been bearish on bonds for a long time. Bianco also said earlier that bonds are finally traded at fair value. The interest rate level currently offered by long-term bonds is fundamentally appropriate. After years of expensive valuations, they are once again attractive, and now is a good time to invest in bonds.

Subramanian said that US policymakers are paying attention to preventing long-term interest rates from rising excessively, and the Federal Reserve and the Treasury Secretary are closely watching the long end of the yield curve. She also mentioned that demographic trends may mean that the current interest rate ceiling is lower than in the 1970s and 1980s, and artificial intelligence (AI) may eventually bring deflationary pressure. Together, these factors create a potentially more attractive context for bonds. She believes that the yield is unlikely to rise sharply above the 6% to 7% range; even if it reaches these levels, the stock market should be able to withstand it.

Recently, the bond market experienced a sharp sell-off due to the market repricing expectations that the Federal Reserve would raise interest rates to curb energy-driven inflation. On Wednesday, the yield on 10-year US Treasury bonds rose to 5.368%, the highest level since the beginning of 2002. As of press time, the yield on the 30-year US Treasury note was 5.337%, and the yield on 30-year US Treasury bonds was 5.719%.

In contrast, the stock market has shown strong resilience to rising yields so far. The S&P 500 closed at a record high on Tuesday, for the first time since August, mainly supported by steady corporate profits and AI-related spending prospects.

However, Subramanian believes that this optimism itself is worth wary of. She pointed out that analysts expect the profit growth of the S&P 500 index to reach the highest level in 40 years or even history in the next five years. “When expectations are so high, you're more likely to experience disappointment rather than actual positive surprises.”

“This isn't the tech bubble of 2000, but I'm really worried that market sentiment has become very bullish,” she also said. A natural slowdown in corporate profit growth is almost inevitable. Previously, a large part of the revenue came from one-time projects of technology companies. At the same time, AI infrastructure bottlenecks may put pressure on corporate profit margins, and the market has prepriced profit margin expansion.

She further described the contradiction in the current market assumption: investors seem to be expecting a “frictionless” environment — capital expenditure will rise above expectations, and revenue from AI will also rise above expectations. Everything will be fine. Interest rates will remain low. Interest spreads will remain narrow. “But it all felt a bit difficult,” she said.

Judging from the performance during the year, US 10-year Treasury yields have risen by nearly 27% so far this year, outperforming the benchmark stock index as measured by changes in yield. Over the same period, the NASDAQ 100 ETF-Invesco QQQ Trust (QQQ.US), which has a high weight in tracking technology, rose about 22%; the S&P 500 ETF-SPDR (SPY.US) and the Dow Jones Industrial Average ETF-State Street SPDR (DIA.US) rose by about 13% and 7%, respectively. The upward performance of 30-year US Treasury yields outperformed the S&P 500 and the Dow, but lagged behind Nasdaq.