Why Rising Bond Yields Haven’t Broken the S&P 500 Rally

The S&P 500 (^GSPC) is only about 2% below its record closing high, even as the 10-year Treasury yield has climbed and surging oil prices have put pressure on long-term rates. The index has pulled back from mid-August highs, but the broader message remains one of resilience: investors are still seeing enough earnings growth and economic momentum to offset the discount-rate headwind.

ClearBridge Investments strategist Jeff Schulze says the market is being driven by a strong earnings environment. S&P 500 earnings rose 52% year over year in the second quarter, giving companies more cash-flow support than the yield increase alone would suggest. That combination has allowed stocks to absorb higher bond yields without a corresponding collapse in expectations for corporate profits.

Earnings are overpowering the yield headwind

Higher yields normally make future corporate profits less valuable by raising the rate used to discount them. But the effect depends on what is happening to those profits. If earnings estimates are rising quickly, the cash-flow benefit can outweigh the valuation pressure from rates.

Schulze argues that this is the market’s current logic. If yields were signaling a material threat to the economy, he says, stocks would likely be much lower because investors would be cutting earnings expectations. Instead, the equity market is treating the yield move as compatible with a healthier growth outlook.

“I think the equity market is reading the situation properly,” Schulze told Yahoo Finance.

What the Treasury yield move is telling investors

The 10-year Treasury yield (^TNX), a benchmark for long-term borrowing costs including mortgages, stood at 4.93% in the cited snapshot, while the 30-year yield was near 5.33%. Four of the previous week’s trading days ended lower as the 10-year touched its highest level since 2023 amid surging oil prices.

The important question is not simply how high yields have risen, but why. Schulze says the move since late-February lows has been driven primarily by higher real rates—yields adjusted for inflation—alongside a repricing of the Federal Reserve’s policy path. Inflation expectations and the term premium have also increased, but far less dramatically.

A basis point equals 0.01 percentage point. The figures describe the cited market snapshot, not a forecast; market components can move together and do not always add mechanically.

Why stronger growth can lift yields and stocks together

A rise in real rates is not automatically bearish. It can reflect investors expecting stronger investment, economic activity, and corporate cash flows. Schulze points to three forces behind the current setup: stronger economic growth, a booming artificial intelligence infrastructure build-out, and a reset in expectations for Federal Reserve policy.

AI-related capital spending can support demand for power, equipment, and related services, while also reinforcing expectations that some companies will continue generating strong revenue. Oil prices add another layer: they can raise input costs and inflation concerns, but the relatively modest rise in inflation expectations suggests the market has not yet treated the oil move as a broad inflation shock.

Schulze also describes the bond-market move as a normalization after a deeply depressed period following the global financial crisis. In that context, some of the yield increase may represent a return toward more ordinary fixed-income pricing rather than a new recession signal.

Seasonality adds a tailwind to the S&P 500

Historical patterns give the rally another source of support. According to Schulze and his team, 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.

That is a favorable backdrop, but it is not a guarantee. Seasonal trends are based on a limited sample and can be overwhelmed by changes in earnings, inflation, monetary policy, or investor risk appetite. The pattern works best as context, not as a stand-alone investment signal.

What could change the yield-stock relationship

Yields remain a real risk. The rally becomes more vulnerable if yields keep rising because inflation expectations, fiscal uncertainty, or a sharper Federal Reserve tightening bias are being repriced. It could also suffer if corporate earnings revisions turn negative or if market gains remain too concentrated.

Investors should watch five signals:

• Earnings revisions: Are companies still raising profit forecasts?
• Real yields: Are they stabilizing, or continuing higher?
• Inflation expectations: Are they remaining contained despite higher oil prices?
• Federal Reserve policy: Is the market pricing stronger growth or renewed inflation pressure?
• Market breadth: Is strength spreading beyond the largest technology names?

Bottom line for investors

For now, rising bond yields are a headwind rather than the dominant story. The S&P 500 can continue to hold up if earnings growth and economic momentum remain intact. If the next leg higher in yields is driven by inflation, fiscal risk, or a more restrictive Federal Reserve outlook, the market may have less room to ignore rates. The current evidence points to a rally supported by cash flows, resilient growth, and favorable seasonality—not by a belief that higher rates pose no risk.

Business, Finance, News, S&P 500, Stock Market Rally, Treasury Market, Interest Rates, Real Yields, Corporate Earnings, Federal Reserve Policy, Artificial Intelligence, Economic Growth, Oil Prices, Inflation, Market Seasonality, Investing, United States, Jeff Schulze, ClearBridge Investments, Positive