Bond yields rising, market centralization intensifying! Schroder reveals two potential risks in the US stock market.

On February 11th, Johanna Kyrklund, Chief Investment Officer of Schroders Global Investment Group, stated that entering 2025, despite high valuations in the US stock market, she still holds the position that positive economic nominal growth and rate cuts are beneficial for the stock market, as it is expected that corporate profits will remain robust and inflation is currently moving in the right direction. With major stock indices no longer providing the same diversification benefits as in the past, and political consensus changes affecting the correlation between different asset classes, investors need to work harder to build resilient investment portfolios. However, she pointed out two risks that concern her. Firstly, the impact of rising bond yields on stocks. The 2010s were characterized by tight fiscal policies and a zero interest rate environment, which led to income inequality and support for populist policies and a new consensus focused on loose fiscal policies, protectionism, and higher interest rates. Loose fiscal policies mean higher borrowing costs. In many regions, an aging population and other expenditure needs will lead to increasing debt levels. Ultimately, these factors will limit the potential returns on investment markets. Government spending helps support the economy, but it may sow the seeds of future problems for the stock market, as excessive spending in the system is usually only resolved in times of economic downturn. Johanna Kyrklund pointed out that as long as bond yields do not rise too much, stock valuations can be maintained at current levels. The current yield on US 10-year government bonds is around 4.8%, and stock valuations relative to bonds have started entering more dangerous territory. Rising bond yields may attract funds out of the stock market and increase borrowing costs for companies. Like most market commentators, she has predicted over the past few years that the US economy may enter a downturn or recession, but the current forecast is for positive development. This may mean that bond yields will receive some relief in the short term from a contrarian perspective, especially since the market has already digested the forecast of a rate cut in the US in 2025. However, high bond yields are a risk that investors need to be aware of in 2025. The second challenge is the concentration of market cap-weighted indices. The strong profit growth brought by large tech stocks in this cycle is very different from the "tech bubble" of 1999/2000. At that time, the valuations had no substantial support or explanation, but now the profits of many large US tech companies can support their valuations. However, given the dominant position of these companies in major indices, any misstep by any one company poses a risk to overall investment market returns. In fact, the concentration of stock market indices now far exceeds that of the late 1990s. From a portfolio perspective, maintaining high positions in a few stocks does not seem wise. More importantly, the different DRIVES behind the "big seven" stocks in the US are underestimated if viewed as individual companies. Given the concentration of the stock market, now is not the time to make bets. The US shares these common risks with other markets. The concentration in European and Japanese stock markets is also high. Investors who rely on past winners to drive performance are starting to miss opportunities. Since the summer of 2024, the development path of investments and stock markets has become more interesting, with different industry sectors recording different performances at different times.