The 30-year US Treasury yield is hovering above 5%, a level that hasn’t been seen since 2007. At the same time, government borrowing costs have surged to multi-decade highs in places like Germany, Japan, and the UK. Normally, you’d think this would spell trouble for equity markets, right? Higher bond yields typically mean more expensive borrowing, which puts pressure on stock valuations and gives investors better alternatives to shares. Yet, equities seem unfazed. The S&P 500 has jumped around 13% this year and is just shy of its record set on August 13. Over in Europe, the STOXX 600 is up nearly 9.5%, and Japan’s Nikkei 225 has skyrocketed by over 27%. So, what’s going on? If rising yields are supposed to be bad for stocks, why aren’t equity markets collapsing?
Well, the answer might not be about how high the yields have climbed, but rather why they are increasing. This week, New York Fed President John Williams shed some light on this. Speaking to CNBC, he explained that the rise in long-term yields is largely fueled by a robust US economy and hefty investments in artificial intelligence and data centers. “What’s driving it…is really a strong U.S. economy and a strong economic outlook fueled by big investments in AI and data centers and technology in general,” Williams stated. This perspective flips the script for investors. If yields are climbing because people expect stronger economic growth, then companies might also see a surge in revenues and profits. Sure, higher borrowing costs can act like a headwind, but if earnings are on the rise, they can help offset some of that pressure.
And it doesn’t stop there. Williams made it clear that it’s not necessarily a case of financial conditions weakening the economy; it’s more about the economy shaping financial conditions. Fed Chair Kevin Warsh echoed similar sentiments at Jackson Hole on August 28. He mentioned that real consumer spending had shot up by more than 2% over the last four quarters, and private domestic final purchases—a measure that combines consumption and investment—had increased at nearly a 3% annual rate during 2026. The labor market is also holding steady, with a jobless rate of 4.1 percent, which is low by historical standards and hasn’t shifted much in a couple of years. Warsh went on to say: “On balance, I would be hard pressed to describe broad financial conditions as restrictive.” That’s quite a statement, especially given that long-term borrowing costs have surged so much.
So, what’s really supporting these equities? It turns out, it’s the numbers—especially company results. According to FactSet’s Earnings Insight from August 28, with 97% of the S&P 500 having reported their second-quarter results, a whopping 86% beat the earnings estimates while 77% surpassed revenue expectations. Both of these figures are above their five-year and ten-year averages. Blended earnings growth for the quarter stands at 52%, marking the fastest growth since the second quarter of 2021. Revenue increased by 15.5%, and the net profit margin hit 17%, the highest FactSet has documented since they started tracking this in 2009.
One voice that stands out in this discussion is Ed Yardeni, a well-known economist and president of Yardeni Research. He’s the one who introduced the term “bond vigilantes” back in 1983 to describe investors who pressure governments through the bond market when they feel fiscal policy is getting reckless or monetary policy is too timid against inflation. Currently, the 10-year Treasury yield remains within his “old normal” range of 4%–5%, which he says reflects the period before the financial crisis and the pandemic. He also points out that the yield remains below nominal US GDP growth. “We’ll worry about the government’s debt when the Bond Vigilantes do,” Yardeni remarked.
But don’t think investors should just overlook the rising yields. The key takeaway is that the critical threshold might not be a specific number like 5%. The real red flag would be if yields keep climbing while economic growth slows, earnings estimates drop, and inflation expectations ramp up. That would create a scenario that stocks dread: higher discount rates coupled with lower profits.
For now, it looks like the market is facing higher rates backed by unusually strong earnings support. The lesson from 2026 so far is that the level of yields matters less than what’s driving them. That doesn’t mean equities are immune to rising yields, but it does suggest that investors might be asking the wrong question. Instead of wondering if higher bond yields are automatically harmful for stocks, they should be examining what’s causing those yields to rise. If yields are increasing because productivity, investment, and economic growth are on the upswing, then equities could absorb the shock. On the flip side, if yields are rising because governments are losing grip on inflation and debt markets are demanding more risk compensation, that’s a whole different ball game.
The next big moment comes on September 16, when the Federal Reserve meets for the first time since Warsh claimed that policy isn’t restrictive. If he stands by that, bond investors may finally get the answers they’ve been searching for.
Kaynak: Orijinal Haber