Treasury Yields Rise: A Bullish Signal or Cause for Concern?

As the U.S. stock market continues its record-breaking rally, investors are keeping a close eye on the bond market, where yields have been on the rise. The 10-year Treasury yield, a key benchmark for risk-free returns, has climbed above 4.1% for the first time since July, extending a run-up that has paradoxically coincided with the beginning of a rate-cutting cycle by the Federal Reserve. This article explores the implications of rising Treasury yields on the stock market and offers insights into potential investment strategies.



Rising Treasury yields can have both positive and negative effects on the stock market. On the one hand, higher yields draw money away from the stock market and lower stock valuations by increasing the yield on lower-risk fixed-income securities. On the other hand, rising yields can discourage consumer and business borrowing, weighing on economic growth and corporate profits. However, some experts argue that the current rise in Treasury yields is unlikely to derail the bull market, as the U.S. economy remains healthy and inflation is expected to moderate.



The strength of the U.S. economy and an expected rebound in corporate earnings could insulate the stock market from headwinds of rising yields. Bank of America analysts expect S&P 500 earnings to grow 15% next year, with growth continuing to broaden beyond the Magnificent Seven—Apple, Microsoft, Nvidia, Alphabet, Amazon, Meta, and Tesla—which accounted for an outsized share of the index’s earnings growth and market performance in 2023. The "Other 493" companies are expected to record double-digit earnings growth in each of the next five quarters.



While rising Treasury yields may compress stock valuations in some periods, stocks have historically advanced in most rising yield environments due to earnings growth. A study from British asset manager Schroders found that in 6 of the 11 periods between 1970 and 2021 characterized as "rising yield environments," stocks advanced in all but two periods because earnings grew fast enough to offset lower valuations.

Few experts expect the 10-year yield to rise much further than it already has, another reason yields are unlikely to derail the bull market. Bank of America analysts expect the Fed to continue cutting rates next year, and forecast the 10-year yield will sit around 3.75% at the end of both 2024 and 2025. Lawrence Gillum, Chief Fixed Income Strategist at LPL Financial, sees a little more room for rates to tick up but still expects yields to fluctuate within a 3.75-4.25% range throughout the rest of the year.



In conclusion, while rising Treasury yields can have both positive and negative effects on the stock market, the current environment is unlikely to derail the bull market. The strength of the U.S. economy and an expected rebound in corporate earnings could insulate the stock market from headwinds of rising yields. Investors should consider rebalancing their portfolios and pursuing maximum diversification across stocks, bonds, real assets, and hedge funds to help mitigate risks around rates, inflation, and government policy.