The Tension Between Equities and Bonds

Global equity markets have demonstrated remarkable resilience, rising 13% year-to-date despite a 100-basis-point surge in the U.S. 10-year Treasury yield. This tension is explained by the Gordon growth model, where rapid corporate profit growth—up 30% for the S&P 500—offsets the valuation pressure of higher interest rates. While rising yields typically compress price-to-earnings ratios, the equity risk premium remains stable because earnings have outperformed expectations. Current market data shows no evidence of investors rotating from stocks to bonds; instead, both asset classes are seeing inflows and moving in positive correlation. Furthermore, large technology firms continue to issue debt to fund AI infrastructure, finding current yields more attractive than equity financing. Although valuation is a poor predictor of short-term returns, it explains nearly half of market performance over a three-year horizon, meaning sustained high yields leave little room for future earnings disappointments.