With the S&P 500 (^GSPC) hovering just 2% below its all-time closing high, investors are questioning why rising bond yields have not exerted greater downward pressure on equities, and whether the market’s robust rally from the first eight months of the year possesses remaining momentum.
“The equity markets have largely been anchored by the robust earnings environment we have been experiencing,” Jeff Schulze, head of economic and market strategy at ClearBridge Investments, told Yahoo Finance.
He highlighted the exceptional strength in S&P 500 (^GSPC) earnings, which surged 52% year over year during the second quarter.
“I believe this trend will persist, and we can expect continued positive market momentum,” he added.
Schulze pointed to encouraging historical data indicating that when the stock market begins the year strongly, it typically finishes strongly.
“When the S&P 500 has gained more than 10% through August, it has advanced from September through December in 25 out of 28 instances, representing an 89% positive hit rate,” Schulze and his team noted in a recent report.
The S&P 500 has slipped slightly from its mid-August peaks but remains within approximately 2% of its record closing level. Four of the previous week’s trading sessions concluded lower as the 10-year Treasury yield reached its highest level since 2023, driven by surging oil prices.
However, the surge in long-term bond yields has not significantly dampened the stock market, potentially due to the underlying drivers of the increase.
Schulze observed that the recent increase in the 10-year Treasury yield (^TNX), a benchmark for long-term interest rates and mortgages, has been driven primarily by higher real rates—meaning rates adjusted for inflation. This upward movement reflects a combination of stronger economic growth, a booming AI infrastructure expansion, and a repricing of the Federal Reserve’s policy trajectory, rather than a spike in inflation expectations or a fiscal credibility shock.
“If current yields were signaling a material threat to the economy, equities would likely be trading significantly lower due to a corresponding reduction in earnings expectations,” Schulze wrote.
Since the late-February lows, the increase in the 10-year Treasury yield has originated primarily from real rates, which have climbed by 50 basis points. By comparison, inflation expectations have risen by only 15 basis points, and the term premium has increased by 17 basis points.
On Friday, the 10-year yield stood at 4.93%, while the 30-year yield hovered near 5.33%, as illustrated in the Yahoo Finance AlphaSpace chart above.
“I believe the equity market is correctly interpreting the current situation,” he told Yahoo Finance. He added, “I really think we are simply normalizing fixed income markets following a deeply depressed period that followed the global financial crisis.”