When Rates Begin to Bite

Rising bond yields are approaching a level that could finally undermine otherwise resilient equity markets.

• The S&P 500 has reached an all-time high despite oil spikes and AI-related concerns, supported by stable economic growth and strong corporate earnings.
• U.S. 30-year yields recently reached a 19-year high, while 10-year yields are about 0.40 percentage points above their spring lows and near the upper end of their 10-year range.
• Higher yields pressure equities by raising discount rates on future earnings and making bonds a more attractive alternative, although strong technology-sector earnings have so far offset that effect.
• Analysis of more than 60 years of data shows that when yields are more than two standard deviations above their three-year average, average monthly S&P 500 price returns have been about -1.70%; returns are around 1% when yields are near average.
• U.S. 10-year yields have averaged roughly 4.3% over the past three years, and a rise above 4.8% would reach the historical threshold associated with negative stock returns.

Takeaway: The market may continue to withstand moderately higher rates while earnings remain strong, but investors should recognize that yields are close to a level that has historically triggered equity weakness.