Inside Markets — Incrementally Cautious

Ten-year yields are currently trading above near-term resistance at 4.475%. A close above 4.48% would further dent the rate-driven bullish case for equity investors. A break above 4.48% also puts the 10-year yield on a path to test 4.73%, which marked the beginning of the bullish equity inflection in early November. Friday’s edition of Inside Markets discussed a potentially underappreciated election risk as the season could shine a light on debt and deficits as a result of massive increases in fiscal spending.

Equities could potentially tolerate a slow and steady climb in 10-year yields toward 4.73%, but a quick yield backup would increase bond market volatility that can spill into equity markets. Subdued levels of equity volatility as measured by the VIX index has driven multiple expansion since the November yield inflection. The VIX index currently sits in a highly supportive range in the low/mid teens. A VIX break above 20 would generate mild multiple compression that would accelerate on closing levels north off 22.

Underwhelming guidance from INTU and WDAY last week continue to weigh on application software names into CRM’s earnings report due tomorrow afternoon. Several other software companies have recently cited challenging macro conditions and a longer sales cycle for their lack of visibility into year-end. One theory is that massive capex spending related to AI buildouts has resulted in companies rerouting IT budgets in order to defend gross margins.