With the S&P 500 (^GSPC) roughly 2% away from its all-time closing high, investors may be wondering why rising bond yields haven't dealt a heavier blow to stocks — and if the rally from the first eight months of the year still has legs.
"The markets that have been taking their cues from the … strong earnings environment that we've seen," Jeff Schulze, head of economic and market strategy at ClearBridge Investments, told Yahoo Finance.
He pointed to the strength in S&P 500 (^GSPC) earnings, which rose 52% year over year in the second quarter.
" I think that that's going to continue, and we're going to see positive market momentum," he added.
Schulze points to encouraging historical trends showing that when the stock market starts out strong, it typically ends strong.
"When the S&P 500 has gained more than 10% through August, it has advanced from September through December in 25 of 28 instances, an 89% positive hit rate," Schulze and his team said in a recent note.
The S&P 500 has edged lower from its mid-August highs, but remains within roughly 2% of its record close. Four of this past week's trading days ended lower as the 10-year Treasury yield touched its highest level since 2023 amid surging oil prices.
But rising long-dated bond yields haven't dented the stock market all that much, perhaps because of what's behind the move.
Schulze noted that the recent rise in the 10-year Treasury yield (^TNX), a benchmark for long-term interest rates and mortgages, has been driven primarily by higher real rates, or rates adjusted for inflation. That move reflects a combination of stronger economic growth, a booming AI infrastructure build-out, and a repricing of the Fed's policy path, rather than a spike in inflation expectations or a fiscal credibility shock.
"If current yields were signaling a material threat to the economy, stocks would likely be much 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 come primarily from real rates, which have risen by 50 basis points. By comparison, inflation expectations have risen just 15 basis points, and the term premium has increased by 17 basis points.
On Friday, the 10-year sat at 4.93%, while the 30-year hovered near 5.33%, as seen on the Yahoo Finance AlphaSpace chart above.
"I think the equity market is reading the situation properly," he told Yahoo Finance. He added, "I really think that we're just normalizing fixed income markets after a really depressed period that we saw coming out of the global financial crisis."
Following the 2008 global financial crisis, central banks slashed interest rates to near zero and kept them there for years to boost the economy.
At this point, the market has priced in a 25 basis point hike by Fed officials on Wednesday, with investors betting on a roughly 90% chance of one after a reading on "core" inflation showed prices rose more than expected last month.
Ines Ferre is a senior business reporter for Yahoo Finance.
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