There is No Longer a Panic Over Interest Rates Among Stock Investors. Now They’re Eying This Risk

Investors seem less anxious about rising interest rates lately, but several risks still loom on the horizon.

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Phil Camporeale, a portfolio manager at J.P. Morgan Asset Management, highlighted inflation as the biggest concern for the latter half of the year. He warned that inflation could not only remain persistent but also accelerate unexpectedly due to rising wages or price increases in the U.S. services sector, particularly in areas like lodging and dining.

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U.S. stocks fell sharply, with the Dow Jones Industrial Average recording its worst week since October. Investors reacted to economic data, including a consumer survey showing rising inflation expectations driven by concerns over tariffs imposed by President Donald Trump. This coming week, fresh inflation data from the Federal Reserve’s preferred gauge—the personal consumption expenditures (PCE) price index—will provide further insight.

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Recently, stock markets have benefited from declining rate volatility, reaching levels last seen in early 2022 before the Fed began its aggressive rate-hiking cycle. “Nothing worries equity investors more than interest-rate volatility,” Camporeale explained. However, with inflation slowing significantly, the Fed adjusted its monetary policy by cutting rates late last year, leading to a more stable environment.

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So far in 2025, the Fed has kept its benchmark rate unchanged after pausing further rate cuts in January. Camporeale suggested that the central bank is currently on the “back burner,” meaning investors are no longer fixated on its next move. This marks a shift from the previous year when market discussions were heavily focused on Federal Reserve decisions. Now, attention is returning to fundamental drivers of the equity market.

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While markets appear to accept that U.S. inflation may stay above the Fed’s 2% target, concerns about a potential resurgence remain. On Friday, the University of Michigan released a report indicating that consumer sentiment has been affected by concerns over tariffs. Joanne Hsu, director of the survey, noted that consumer inflation expectations have worsened significantly. While a temporary rise in these expectations is not alarming, Hsu warned that if these concerns persist, they could pose challenges for policymakers.

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Investors will receive more clarity on inflation when the Fed releases its PCE report on February 28. According to Sameer Samana, head of global equities and real assets at Wells Fargo Investment Institute, the Fed appears to have reached a point where further action is unnecessary for the time being. Samana also pointed out that bond market volatility is no longer a major issue, as reflected by the ICE BofAML MOVE Index, which recently hit its lowest level in three years.

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Although the MOVE Index rose slightly on Friday, it has declined nearly 18% over the past six months, according to FactSet. The index closed at 91.83, down approximately 7% since the beginning of the year. Earlier this month, it was trading near levels not seen since early 2022—just before the Fed initiated rate hikes.

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Despite Friday’s market sell-off, the S&P 500 remains close to its all-time high, which was reached on February 19. The index ended Friday’s session at 6,013.13, approximately 2.1% below its record close. So far this year, the S&P 500 has climbed 2.2%, even though the information technology sector—traditionally a market leader—has fallen 0.3%, based on FactSet data.

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In the upcoming week, investors are eagerly awaiting quarterly earnings from Nvidia Corp., scheduled for February 26. Samana noted that the market has broadened beyond technology stocks in 2025, with financials now playing a significant role in the rally. While the S&P 500’s financials sector dipped on Friday, it remains up 4.8% for the year.

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A key concern for the equity market is the historically low "equity risk premium," a measure of how much extra return investors demand for holding stocks over risk-free bonds. According to a recent Wells Fargo Investment Institute report, the premium is at multidecade lows. Samana acknowledged that “stocks aren’t as attractive as they were last year,” but he still views the S&P 500 as a better investment than bonds, given the current 10-year Treasury yield of approximately 4.5%.

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The yield on the 10-year Treasury note dropped 8 basis points on Friday, settling at 4.419%—the lowest level since December 17, according to Dow Jones Market Data. Camporeale argued that a 4.5% yield on a 10-year note is not enticing when money market funds offer similar returns without the risk associated with long-duration bonds.

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Camporeale remains bullish on equities, favoring U.S. stocks. He has been shifting his portfolio by selling core bonds, including U.S. Treasurys, in favor of high-yield corporate debt and increasing his equity exposure. Following the U.S. presidential election in November, he also added value and mid-cap stocks to his portfolio. For the S&P 500, he expects "low-double-digit returns" this year.

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Overall, while inflation and other risks persist, falling rate volatility and a diversified equity rally suggest that investors are cautiously optimistic. With key inflation data and major earnings reports on the horizon, market participants will closely monitor whether these risks materialize or fade in the months ahead.

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