Analysts at Morgan Stanley led by Michael Wilson and Andrew Pauker reported that U.S. equities are currently showing increased short-term sensitivity to real interest rates. In a client note, they highlighted that the rolling one-month correlation between the benchmark S&P 500 index and real yields "just recently dropped" to its "strongest inverse correlation in four months."
The team explained that an inverse correlation indicates a statistical tendency for two variables to move in opposite directions.
"While resilient equity fundamentals are likely to dictate 3-6 month returns, real rate fluctuations are important for the tactical set-up for the major indices," the analysts wrote, pointing to the role of near-term rate moves in shaping how indices behave. They added, "This makes sense given the macro announcements/data releases likely ahead of us in the coming weeks."
Markets face a key Federal Reserve policy decision this week, with the central bank widely expected to leave its target range for the federal funds rate unchanged at 3.5% to 3.75%. The note underlines that the U.S. economy has shown signs of resilience: the jobs market has featured both low hiring and muted layoffs, while inflation remains stable but sits above the Fed's 2% objective. Against that backdrop, Fed policymakers are not anticipated to cut rates until June at the earliest, according to CME FedWatch.
Because employment and inflation remain areas of pressure for the Fed's dual mandate, further readings on both measures will be closely watched by market participants.
At the same time, a busy corporate earnings calendar includes reports this week from major technology companies such as Facebook-owner Meta, software giant Microsoft, and iPhone maker Apple. Morgan Stanley's analysts expect the most recent quarterly reporting period to act more as a "stock-specific catalyst" than as an "index-level driver," even though a recent weakening of the U.S. dollar could provide a partial tailwind for some firms.
In sum, the note distinguishes between the medium-term influence of underlying equity fundamentals and the shorter-term impact that swings in real interest rates can have on market positioning. With significant macro data and corporate results on the near-term horizon, the analysts view real rate movements as an important consideration for tactical setups across major indices.