A strong case could still be made to long stocks even as rising 10-year yields continue to place pressure on certain sectors of the markets, argues Merrill Lynch strategists.
"We think the three pillars of the bull market are firmly in place — massive free liquidity, an exceptionally strong EPS growth cycle and substantial market breadth," Merrill Lynch equity strategists Ajay Singh Kapur and Ritesh Samadhiya co-wrote in a research note on Thursday. They believe a "bullish cocktail" for stocks is still in play.
The strategists think the time to get more defensive would be when liquidity conditions tighten, EPS growth decelerates and market breadth breaks down. Until those factors kick in, the reasons to be long outweigh the downside risks, the duo suggests.
"Till that time, stay bullish. Buy cyclicals, value, and start taking a fresh look at tech, already bruised by rising bond yield concerns," Kapur and Samadhiya note.
The call to take a "fresh look at tech" is among the first on the Street to be made amid a month's long rout in the formerly hot space. The NYSE FANG+ Index — which tracks the performance of household-name tech stocks such as Facebook, Apple and Tesla —has dropped 8.3% since hitting a record closing high on Feb. 17. Selling pressure persisted on Thursday as a somewhat hawkish Fed meeting on Wednesday kept upward momentum on 10-year yields.
Sell-offs in tech outside of the closely watched FAANG complex have been more concerning. Tesla shares are down 16% inside of a month, Salesforce is off 15% and Zoom has shed 24%.
To be sure, not everyone on the Street is on board with being super bullish on stocks at the moment. The pace of increase moving forward in the 10-year yield could be an impediment to equities, explained Queens' College, Cambridge president and well-known investor Mohamed El-Erian on Yahoo Finance Live.
"The problem is we have a marketplace that is psychologically relying on the Fed. And if the Fed is no longer in control of the bond market, a few things happen. One, it fundamentally shakes the confidence in the liquidity paradigm. Second, there is no alternative to stocks," El-Erian said. "You know what? As yields head higher there may be an alternative to stocks. That holds back the buy the dip conditioning that has been so helpful to markets. And finally, look for model driven flows to start being less bullish about the equity market. Why? Cash flows will look different."
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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