Global Market Strategist
In Brief
- Equity markets can absorb gradual growth-led increases in bond yields, but rapid moves are more disruptive.
- The pace of yield moves matters for markets in the short term, but the absolute level can also become a constraint on growth.
- Growth-heavy equity indices are increasingly sensitive to higher yields as duration extends and more earnings growth is pushed into the future.
For most of 2026, equity markets have largely shrugged off rising bond yields, buoyed by steady economic growth despite various shocks and robust capital expenditures in artificial intelligence (AI) supporting the corporate outlook and earnings. U.S. equities reached a fresh all-time high as recently as mid-August, even as the U.S. 10-year Treasury yield climbed 53 basis points (bps) compared with the start of the year.
However, beneath the surface, equities have become more sensitive to movements in yields that reflect an uncertain inflation outlook and developed-market central banks reconsidering whether further policy action is needed during this tightening cycle. Importantly, the equity market’s response is not just to the rise in yields, but also to the reasons behind the move and the speed at which it occurs.
Term premium returns
Several factors are driving the rise in U.S. yields at the long end of the yield curve, including concerns about debt sustainability and deficits, energy-driven inflation pressures, global spillovers from higher yields in Japan, as well as increased competition for capital given the higher investment-grade bond issuance this year related to AI-driven capex.
The dominant force is higher real yields rather than higher inflation expectations. This suggests that investors are demanding greater compensation for taking on extra duration risk and, increasingly, fiscal risk amid rising deficits and the prospect of greater bond supply, rather than simply repricing for inflation.
In essence, this is a story about the return of the term premium. With central banks no longer suppressing yields, growth proving resilient, and inflation running persistently above target in the U.S. and many parts of the world, markets are recalibrating for higher rates of nominal growth and reassessing what the long end of the curve should look like.
Why the pace of yield moves matters
Historically, there have been yield levels where the impact on equities becomes more pronounced. These thresholds shift over time and depend on the prevailing economic and inflation regime. Since 2000, as 10-year yields have approached 5%, the correlation to equity returns has become increasingly negative. While the starting level of bond yields is relevant for market behavior, the equity market’s reaction to higher bond yields is more about the pace of change.
U.S. Federal Reserve (Fed) Chair Ben Bernanke’s congressional testimony in 2013 sparked the so-called “taper tantrum”, as markets reacted to news that the Fed might reduce the pace of its monthly bond purchases under the quantitative easing program. The result was a 50 bps move in the 10-year yield and a 5.0% drop in the S&P 500 over the following month. The lower starting point for yields meant that this was close to a six- standard-deviation move in yields from the three-month low.
While this was at the more extreme end, historical analysis suggests that yield moves exceeding two standard deviations in a three-month window create indigestion for equity markets (Exhibit 1).
When yield levels become a roadblock
The absolute level of yields, regardless of how quickly it’s reached, eventually becomes a constraint on economic activity. Government yields determine the cost of capital, influencing corporate borrowing costs, mortgage rates, and discount rates applied to new investments.
A gradual rise in yields will eventually tighten financial conditions as much as a rapid one, but with less interim market disruption. Even a rise in yields driven by more growth-positive forces may eventually undermine the economic outlook if sustained for a long enough period.
A market shaped by growth
History can be a guide, but the shift in equity market composition may influence the interplay between bond yields and equity returns. The sensitivity of equity markets like the U.S. to higher yields has likely increased as the index itself has become more growth-oriented. The weight of the technology sector in the S&P 500 has risen from 20% to close to 40% in the last decade.
The earnings of the companies at the heart of the AI theme are heavily skewed toward the future, like long-duration bonds. As the AI-capex cycle has pulled a larger share of the market into this longer-term duration cohort, the index overall has extended its duration.
This may increase the sensitivity of equity valuations to rising bond yields and rising real yields, given the larger impact on the present value of future earnings.
Investment implications
Investors should assess not only the level of yields, but also the pace and cause of any increase. A gradual rise driven by resilient growth is generally easier for equities to absorb than a rapid increase in real yields or the term premium.
Our view is that the AI cycle is still in its infancy when comparing it with prior episodes of significant technological change. This implies many years of capital investment to come, which should support earnings growth and higher valuations overall.
However, the S&P 500’s growing concentration in AI-linked mega cap growth stocks, which behave like long-duration assets, may amplify valuation sensitivity to spikes in bond yields. This reinforces the importance of diversification, valuation discipline, and a focus on durable cash flows.