Investors often view a lower federal funds rate as positive for stocks, since cheaper borrowing can boost corporate investment and consumer spending. However, rate cuts can also signal economic weakness.
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In addition, lower rates don’t guarantee higher stock prices or lower bond yields, as market reactions depend on investor expectations and the broader economic context.
“Last year they cut rates, and the market decided it wasn’t the right move,” said Bianco Research President Jim Bianco in an interview with Yahoo Finance. “And it shot yields on the 10 [year Treasury] and the 30-year up over 100 basis points.”
Higher Yields Could Attract Capital Away from Stocks
In the event of higher yields following the September 16-17 Federal Open Market Committee (FOMC) meeting, the Magnificent 7 could be at risk as investors could shift away from high-growth, richly valued stocks toward safer or more income-generating assets. Bianco believes that the 10-year Treasury yield hitting 5% or higher could result in profit-taking from the Magnificent 7 stocks.
What’s more, the market is currently experiencing record-high levels of concentration. According to Bloomberg, the largest 10% of companies make up 76% of the total market capitalization, an all-time high. That means that a Magnificent 7 selloff would likely impact the entire market.
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