Are We on the Cusp of a Major Asset Allocation Shift?

Higher-than-expected US employment data could reignite inflation, push long-term Treasury yields higher, and trigger a shift from expensive equities toward higher-yielding bonds.

• September nonfarm payrolls are expected to rise by approximately 90,000, above the 80,000 monthly average through August but well above the 10,000 monthly average recorded in 2025; unemployment is expected to remain at 4.1%.
• Inflation risks are reinforced by rising US rents, energy and semiconductor prices, while the Atlanta Federal Reserve reports that job-switchers are receiving their largest pay increases since 2024 and the Bank of America Institute reports the biggest wage gains since 2023.
• In 2023, the US 10-year Treasury yield rose from approximately 3.3% in early April to 5.0% over seven months, while the Moody’s Baa Corporate Bond Index yield increased from approximately 5.4% to 6.8% and the S&P 500 fell nearly 11% from late July to late October.
• Today, the 10-year Treasury yield is approaching 5.3%, its highest level since June 2007, the Moody’s Baa yield is 6.7%, and the S&P 500 trades at approximately 19.0 times forward earnings, making bonds relatively more attractive to investors such as pension funds targeting 7%–7.25% returns.

Takeaway: Equity investors should prepare for downside risk from higher long-term US interest rates and a possible rotation into bonds, although non-US equities may be less vulnerable because of lower valuations and a milder inflation backdrop.