Jefferies uses the 10-year TIPS yield, currently at 2.36%, as a leading indicator for stock market performance. Historical data since 1997 shows that when TIPS yields exceed the 70th percentile, global equity returns are weak: the S&P 500 posts an average monthly return of just 0.2%, while Japan sees an average monthly loss of 0.5%. The U.S. budget deficit reached $432.3 billion in July, the highest since March 2021, and global AI-related investments are expected to surge 28% in 2026, keeping long-duration funding costs elevated. In this environment, Jefferies recommends investors focus on quality and yield, targeting sectors like software, financial services and discretionary retail.
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