Macquarie tips rotation in stocks, while JPMorgan sees rally fading
The trade war de-escalation has helped the US economy, leaving analysts to ponder how long the run of good data will continue and what it means for stocks.
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The trade war is far from over, but its de-escalation in recent weeks has helped the US economy, leaving analysts to ponder how long the run of good data will continue.
The de-escalation has been great for stocks. Australia’s S&P/ASX 200 index rose 7.4 per cent in April and May and rebounded as much as 18 per cent from its April 7 low.
Bond yields also rose, as the 10-year Treasury yield hit a three-month high of 4.62 per cent last month.
Macquarie Equities sees this upward pressure on bond yields causing a short-term “rotation” to stocks that tend to benefit from higher yields.
Of course, improving economic data helps the earnings outlook for some companies, but not necessarily the whole market. Unlike the US, where tech sector earnings estimates have been upgraded, Australian profits are currently in a “downgrade cycle”.
For investors wanting to hedge against the short-term risk of higher bond yields, Macquarie’s “yields beneficiary” stocks that and aren’t currently being downgraded include QBE Insurance, Insurance Australia, Suncorp, Light & Wonder, BlueScope, AUB, News Corp and Helia.
On the flip side, Endeavour, Dexus, APA, Amcor, Woolworths, Centuria Office REIT, Growthpoint Properties, Cromwell Property, Region and BWP Trust are negatively correlated with bond yields and aren’t enjoying an offsetting upgrade cycle underway.
“Economic surprises are now positive and are pushing up bond yields,” said Macquarie’s Australian equity strategist, Matthew Brooks. “Rising yields and reduced recession fears likely to drive some rotation out of bond proxies and into stocks that benefit from higher yields.”
With US President Donald Trump starting a 90-day pause on the country-specific component of reciprocal tariffs on April 9 and the US and China agreeing to end their retaliatory tariffs for 90 days, Citi’s US Economic Surprise Index turned positive for the first time in three months last week.
The US 10-year bond yield fell from 4.62 per cent to 4.41 per cent since then. But after smoothing the volatility in economic surprises and bond yields, Macquarie’s chart shows that both are rising.
“Equities usually post better returns in surprise upcycles,” said Macquarie’s Australian equity strategist, Matthew Brooks. “While tariff uncertainty remains an overhang, there is scope for the improvement in sentiment to continue in the near term.”
He sees bond yields as a “key constraint” for stocks from here.
In recent times, stocks have struggled when the 10-year US Treasury yield rises above 4.5 per cent.
Based on the lead from bond yields, he expects the upturn in positive US economic surprises to peak in July, perhaps amplified by tariff news when the pause of country-specific tariffs ends on July 9.
Tariff news worsened over the weekend when President Trump said he will increase US tariffs on steel and aluminium imports from 25 per cent to 50 per cent on Wednesday.
The latest tariff news pushed S&P 500 futures down 0.5 per cent in Monday’s Asia-Pacific trading.
It comes after a US Court of International Trade ruling last week initially blocked the majority of tariffs, although that judgment was subsequently stayed by the Federal Circuit Court of Appeals.
That ruling kept the 10 per cent baseline component of reciprocal tariff and as well as country-specific tariffs on Canada, China, and Mexico related to fentanyl.
Last week, President Trump agreed to delay a 50 per cent tariff on the EU until July 9, essentially aligning it to the end of the 90-day pause on the country-specific components of the “reciprocal” tariffs, to allow for negotiations.
“Bond yields have been rising with economic surprises in 2025, and this suggests upward pressure on bond yields in the near term,” said Macquarie’s Brooks.
US long bond yields have also risen as expectations of further interest rate cuts have been pushed out to the second half of 2025 because of inflation risks from tariffs and a resilient economy.
Mr Brooks expects the data-dependent central banks to react to the upturn in US economic data with a “hawkish shift” in July-August, potentially hitting the stock market and bond yields.
“Even if the overall market is flat, in the near term we would still expect rising bond yields and reduced fear of a US recession to drive a rotation out of bond proxies and into stocks that benefit from higher yields,” Mr Brooks said.
Meanwhile, J.P. Morgan’s head of global equity strategy, Mislav Matejka, expects a rise in US inflation and fall in US economic data to “arrest” the recent strong recovery in stocks.
“Given the equity rebound, with both the S&P 500 and Euro Stoxx 50 currently a few per cent above the pre-Liberation Day levels, positioning is not cautious anymore, short covering was significant and systematic re-risking took place on the normalisation in volatility, and investor sentiment has recovered. Consequently, equity moves should be more driven by fundamental outcomes.
“Here, we look for softer activity over the next months, but also higher inflation prints in the US.
“Past front-loading of orders in the run-up to tariffs is likely to have a payback, there will be some weakening in consumers due to a squeeze in purchasing power, and even with dramatic back-pedalling, the current tariffs picture is worse than most thought at the start of the year.
“Soft data is recovering on reduced trade risks and recent risk rally, but it is unlikely to fully close the gap with the hard data – convergence from both sides is likely.”
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Originally published as Macquarie tips rotation in stocks, while JPMorgan sees rally fading
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