Wall Street could be in for a brutal six months. Rising Treasury yields and a stronger dollar are hammering market sentiment, leaving investors scrambling for cover.
According to Morgan Stanley strategists, inflation fears are driving the 10-year Treasury yield past 4.5%, and the 30-year yield just hit its highest point since late 2023.
Michael Wilson, Morgan Stanley’s strategist, said the relationship between the S&P 500 Index and bond yields has turned “decisively negative.” This isn’t good news for a market that’s already running on fumes. A strong dollar is now pressuring companies with large international operations, tightening the screws on the broader market.
“We think 2025 could be a year of two halves,” Wilson wrote, implying a rough start but better days ahead if tax cuts and market-friendly policies come into play.
Stock market struggles as yields bite harder
In December, the S&P 500 rally fizzled out as economic worries and a Federal Reserve with a hawkish tone made investors nervous. Tech stocks, which have been the backbone of the S&P 500 since late 2022, were hit hardest.
The market’s narrow gains are making things worse. Wilson pointed out that the gap between the S&P 500 and its individual stocks, based on the 200-day moving average, is unusually wide.
This kind of divergence only closes in two ways: broader participation or the index dropping closer to its own moving average. Neither scenario feels easy.
Wilson thinks narrowing this gap might need lower interest rates, a weaker dollar, more clarity on trade policies, and better earnings reports. He hasn’t sugarcoated the risks. While he expects the S&P 500 to recover this year, he’s warning that the gains won’t be widespread.
Morgan Stanley predicts the S&P 500 will hit 6,500 points by the end of the year—a 9% jump from where it was last Friday. But those gains might not kick in until later in 2025. For now, the stronger dollar and rising yields look like a double whammy for stocks.
Markets split, Bitcoin shines
Bitcoin, though, seems to be a standout asset right now. As stocks are plagued with uncertainties, Bitcoin bulls are getting comfortable, with prices less than $200 away from $100,000. Analysts expect its prices to double.
It’s up 5.66% over the past week, the biggest weekly gain since late November. The market is buzzing, especially with Donald Trump’s election victory about to be confirmed.
Crypto enthusiasts are pinning hopes on Trump’s promises of a friendlier regulatory environment, with new legislation targeting stablecoins and market structures potentially on the horizon.
Bitcoin had a banner year in 2024, closing out with gains of over 120% despite some hiccups in December.
A post-election rally pushed prices past $100,000 for the first time, then the momentum faded as uncertainty over Federal Reserve interest rate cuts grew. Still, investors remain bullish. On Friday, Bitcoin ETFs saw $908 million in inflows.
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