US Stocks Keep Climbing Despite Rising Bond Yields

I checked the tape twice this morning, mostly because I did not quite trust the first look. Yields were higher again. Rate chatter was louder. And yet the big US indexes were green, not by a little, not on a thin bounce, but in that stubborn way markets get when sellers have already used their best argument and buyers still show up. If you have been waiting for higher bond yields to knock US stocks off their stride, you are not alone. Plenty of sensible people have been waiting. The market has not obliged.

So far this year the broad large-cap index is up another 12 percent. The technology-heavy benchmark is up roughly a fifth. That is not a quiet grind. It is a market that keeps finding buyers even while the bond market is squealing. I have found that the most useful question is rarely “why is this happening?” in the abstract. It is “what would have to be true for this not to be crazy?” Right now the answer sits in profits, and the numbers are awkward for anyone still treating this as a pure multiple story.

Why US Stocks Are Still Rising While Yields Climb

Asset managers have started calling the profit backdrop a golden stretch, and for once the phrase is not pure marketing. Second-quarter earnings for the large-cap universe rose about 50 percent from a year earlier. That is the sort of jump you usually see when an economy is clawing out of a recession, not when it is already expanding and headlines are full of rate anxiety. An increase like that rewrites the valuation math before lunch.

Mega-cap technology is still out in front. Nobody serious pretends otherwise. What has changed, at least on my reading of the tape, is the company it keeps. Energy producers are collecting more cash as fuel prices firm. Banks are throwing off earnings because higher rates, within reason, fatten net interest income. Industrials tied to power equipment, cooling, grid work and construction are riding the data-centre build. The boom is not a single story wearing five different tickers. It has width.

Here is the part that still surprises people who learned markets in the last cycle. Earnings have grown so fast that valuations have actually come down. The large-cap index trades near 19 times forward earnings, against about 23 a year ago. You do not often watch a bull market mark itself cheaper while prices rise. Cheaper is relative, of course. Nineteen times is not a bargain-bin multiple. It is simply less stretched than the number investors were paying when profits were thinner.

A rising market with a falling multiple is not a contradiction. It is what happens when earnings sprint and prices only jog.

The Profit Boom Is Doing the Heavy Lifting

Price is a numerator. Earnings are the denominator. When the denominator jumps by half, you can have a decent year in the index and still look less expensive on a forward basis. That is the mechanical bit. The human bit is harder. Investors have to believe the new earnings are not a one-quarter firework.

Perhaps the most interesting aspect is how broad the cash generation looks. Technology still supplies the glamour and a large share of the incremental profit. Energy supplies the inflation hedge that equity investors secretly wanted when fuel prices started to bite. Banks supply the rate story in its friendly version: wider spreads, decent credit, fewer surprises. Industrials supply the physical layer under the digital one. Power management, switchgear, concrete, skilled labour. None of that is a slide deck. It is order books.

I keep a simple mental split when earnings look this hot. How much is volume, how much is price, how much is mix? Volume matters because it can reverse if demand cools. Price matters because it can reverse if competition returns. Mix matters because a shift toward higher-margin work can linger even after the easy comparisons fade. Right now all three seem to be helping in different sectors. That is why a single “AI trade” label feels lazy. Useful, yes. Complete, no.

What a Falling Multiple Actually Tells You

Market commentators who spend their days in the weeds have been asking a fair question. If companies are delivering superb growth, why are investors not willing to pay last year’s multiple? In my experience, a lower multiple in a rising market is the market doing risk management out loud. It is not always a sell signal. Sometimes it is the price of staying invested.

Three explanations keep coming up, and I think all three have a piece of the truth.

• Buyers are assuming the current spending wave, and the profits attached to it, will not run at this pace forever.
• Inflation anxiety is still in the room. Hot growth is fun until it forces policy tighter than anyone modelled.
• Higher bond yields are real competition. Cash and high-grade bonds pay you to wait. Equities have to earn that hurdle.

None of those points require a crash. They require humility about the multiple. A market can rise 12 percent and still be telling you it does not trust the good times to compound at the same rate. That is a more adult message than the victory laps on financial television.

Bond Yields Are No Longer a Background Noise

For a long stretch after the pandemic, equities could ignore the bond market because the bond market was pinned. Those days are gone. Yields are the price of money over time, and they have been climbing hard enough to make income investors feel relevant again. When a safe yield moves up, the discount rate on distant cash flows moves with it. Growth stocks feel that first. Everyone else feels it later, usually in the cost of capital buried inside a project spreadsheet.

So why have US stocks not buckled? Partly because the earnings surprise has been larger than the valuation haircut. Partly because a chunk of the index now earns money from the same force that hurts long-duration assets. Banks like a steeper, healthier curve, up to the point where credit cracks. Energy likes nominal strength. Some industrial firms like the capex that inflation and reshoring drag along with them. The index is not one duration bet anymore, even if the biggest weights still lean that way.

There is also a behavioural layer I do not want to dress up as science. Investors who sold the first yield spike already sold. The second and third spikes meet a holder base that has heard the argument. Familiar fear is weaker fear. That does not make the fear wrong. It makes the price reaction smaller until something new arrives.

The Economy Under the Index Is Running Hot

A widely watched regional growth tracker has been pointing to something close to a 5 percent annualised pace for the quarter just ended. Business surveys are printing activity at the strongest level in more than five years. You can quarrel with trackers. They get revised. Surveys have moods. Still, when both are pointing the same way, dismissing the heat becomes a hobby rather than an analysis.

Strategists watching the macro tape have lined up three fuels. Fiscal largesse. Booming business investment. And interest rates that, once you adjust for inflation, are not nearly as tight as the headline number suggests. Near-zero real rates plus heavy public spending plus a private investment boom is a recipe for momentum. It is also a recipe for overheating. Those two outcomes are not rivals. They often arrive as a pair.

The claim that the domestic economy is the hottest large economy in the world is not far from the data. Heat is not the same thing as safety.

Market desk commentary, paraphrased

Overheating is the risk that equity bulls skip too quickly. If activity stays this firm, policy rates may have to climb further than the soft-landing script allows. The open question is whether that would actually kill the bull market in US stocks, or merely make it choppier. History, inconveniently, supports both answers depending on which chapter you open.

Low Leverage Is the Quiet Support

Public debate loves the government debt chart. Fair enough. The public balance sheet is large, and the interest bill is no longer a rounding error. What gets less airtime is the private side. Households, on the whole, are not leveraged the way they were before the last housing bust. Companies, on the whole, termed out cheap debt when they had the chance. Net interest payments across US firms have fallen to a more than 20-year low.

That single fact changes the rate story. If interest expense is a small slice of profits, a higher policy rate does not hit the income statement the way a textbook from 2006 would predict. Sensitivity is lower. Not zero. Lower. Credit can still crack in the corners: commercial property, smaller borrowers, anyone who rolled short and hoped. The median large company is simply less fragile than the bond-yield headlines imply.

I’ve found that investors argue past each other here. One camp says “rates are up, so equities must fall.” The other says “balance sheets are fine, so rates do not matter.” Both are too clean. Rates matter at the margin, through discount rates, through housing, through the dollar, through the projects that no longer clear a hurdle. They matter less, right now, through a wave of corporate defaults. Holding both ideas at once is uncomfortable. It is also closer to the tape.

Where the Money Is Actually Being Made

Strip out the index and the rally has a few distinct engines. None of them needs a slogan.

1. Technology platforms and chip suppliers still capture the largest profit pool, with spending plans that dwarf prior cycles.
2. Energy producers are converting higher fuel prices into cash rather than into a fresh drilling frenzy, at least so far.
3. Banks are earning more on loans and securities than they did in the zero-rate years, provided credit costs stay tame.
4. Industrial suppliers to data centres are selling power gear, cooling and construction capacity into a multi-year build.
5. A scatter of consumer and healthcare names are growing without needing the AI narrative at all.

That last point matters for anyone tempted to call the whole market a theme fund. Breadth is not perfect. It rarely is. It is better than the caricature. When energy, banks and industrials can rise alongside the usual growth leaders, a pullback in one pocket does not automatically become a market event. It becomes a rotation. Rotations feel violent when you are in the wrong pocket. They are healthier than a market that lives or dies on five stocks.

The Spending Wave Investors Refuse to Capitalise Forever

Why would a rational buyer refuse to pay 23 times earnings for companies growing this fast? Because the buyer has seen spending waves before. Telecom build-outs. Shale. Cloud migrations that were real and still over-earned in the story version. The current outlay on computing infrastructure is enormous. It is also concentrated. A handful of buyers are writing cheques that move national investment statistics. That is extraordinary. It is also a concentration risk wearing a growth costume.

Markets are pricing an assumption, not a fact: the splurge will not last at this intensity, and the associated profits will normalise. You can disagree with the timing and still accept the shape. Capex booms peak. Utilisation rates settle. Competition shows up with a cheaper chip, a better cooling design, a power contract someone else locked in first. When that happens, the earnings growth rate does not need to go negative to hurt a rich multiple. It only needs to slow.

I do not think the physical build is fake. Power constraints are real. Lead times on equipment are real. Companies do not pour concrete for a press release. The valuation question is narrower. How many years of peak order growth are you willing to put into today’s price? The drop from 23 times to 19 times is the market’s rough answer. Not a collapse in faith. A shorter assumed runway.

Inflation Is the Guest Who Might Stay Late

Strong nominal growth feels wonderful in an earnings release. Revenue up, pricing firm, operating leverage doing its quiet work. The same strength is a problem if it keeps inflation from settling where policy makers want it. Fuel prices feed that risk directly. A tight labour market feeds it indirectly. Fiscal impulse feeds it politically, because cutting spending into a boom is rarely anyone’s first instinct.

Equity investors have two inflation regimes to fear, and they are not the same. Mild, stable inflation with real growth is a friend to nominal earnings and to companies with pricing power. Unstable inflation that forces abrupt rate hikes is a friend to almost nobody outside short-duration cash. The tape right now is trying to live in the first regime while bond traders price a bit of the second. That gap is the argument you hear every afternoon.

Perhaps I am too wary of late-cycle confidence. Hot PMIs and a 5 percent growth tracker do not scream recession. They scream “do not get cute with duration.” If you own equities here, you are implicitly betting that profits can outrun whatever extra tightening arrives. That bet has been right this year. It is not a law of nature.

Two Old Tape Patterns, and Why Both Still Matter

There is precedent for US stocks to rally even while bond yields surge. In the mid-1990s, a sharp yield backup tied to a surprise tightening cycle knocked the large-cap index down about 8 percent at first. Then earnings, backed by a strong economy, pulled the market back. The rate shock hurt. It did not end the expansion, and it did not end the bull market. Investors who sold the yield spike and waited for a “cleaner” entry spent the next several years watching the cleaner entry never arrive at a lower price.

The other precedent is less comforting. Late in that same decade, rising yields left markets choppy rather than broken. Shares then rallied into a speculative peak in early 2000. From there to late 2002 the index fell roughly 49 percent. The economy did not have to collapse on day one for the equity damage to be severe. Valuation, concentration and a capex story that outran cash returns were enough.

Which rhyme are we in? I wish the question were decorative. It is the whole job. Today’s optimism has two props the late-1990s tape also had: a technology spending boom, and a belief that geopolitical risk might ease rather than worsen. Hopes of a diplomatic opening in a tense region have been part of the risk-on mood. Props are not proof. A strong economy can support earnings the way it did after the mid-1990s shock. A crowded narrative can still overstay, the way it did at the end of that decade.

Two histories, one tape:
  Mid-1990s yield shock: initial drop, then earnings repaired the damage.
  Late-1990s melt-up: choppy yields, a final rally, then a long drawdown.
  Shared ingredient: a real economy that looked fine until valuation did not.

People reach for these analogies because they want permission. Permission to stay in, or permission to leave. Analogies do not grant that. They only stop you pretending the current mix of hot growth and rising yields has never been seen. It has. The endings diverged.

What “Partying Like the Late Cycle” Should Mean

The phrase gets thrown around whenever screens are green and sceptics are tired. Used carefully, it does not mean a crash is scheduled. It means the burden of proof has shifted. Early in a bull market, bad news is ignored because positioning is light and valuations have room. Later, good news has to keep arriving on time. Miss the quarter, miss the order, miss the policy path, and the multiple you “deserved” last month is gone.

A few tells I watch, none of them magic:

• Whether earnings beats are still broadening, or shrinking back to a handful of mega-caps.
• Whether industrials linked to the build keep reporting backlog, or start talking about deferrals.
• Whether bank credit costs stay dull. Dull is good. Interesting is rarely good in credit.
• Whether real rates rise faster than forward earnings estimates. That is the crossover that hurts.
• Whether new issuance and speculative listings come back in size. Froth has a paperwork trail.

You can hold a constructive view and still keep that list on the desk. In fact, the constructive view is more credible if you do. Blind optimism is not analysis. It is a mood.

Fiscal Fuel, and the Hangover It Can Bring

Government spending has been a quiet co-author of this expansion. Transfers, industrial policy, defence, infrastructure, interest on the debt itself: the public sector is not a spectator. Equity investors like the near-term demand. Bond investors have to fund it. That tension is exactly why stocks and yields can rise together for a while. Nominal growth lifts profits. The same nominal growth, plus issuance, lifts the term premium.

Is that sustainable? For longer than purists expect, yes. Forever, no. A debt stock that compounds faster than the tax base eventually argues with the currency, with term premiums, or with inflation. The path matters more than the sermon. If deficits stay wide while private investment is also booming, the economy can overheat without any household going on a borrowing binge. That is the oddity of this cycle. The leverage everyone feared in families and firms is quieter. The leverage in the public accounts is not.

I do not think equity holders need a debt crisis to feel this. They only need auctions that clear at higher yields, and a central bank that refuses to cap them. The competition from fixed income then stops being theoretical. A portfolio that can earn a mid-single-digit yield in high-grade bonds will demand more from equities than it did when bonds paid almost nothing. US stocks have met that demand this year with earnings. They will have to keep meeting it.

Real Rates Are the Number People Skip

Nominal policy rates look high if you compare them with the last decade. Compare them with inflation and the picture softens. Several desks have argued that inflation-adjusted rates are close to zero, which would help explain why housing has not collapsed, why investment plans are still being approved, and why the economy can run hot without a classic credit crunch. If that adjustment is roughly right, a lot of “tight policy” commentary has been describing the sign on the door rather than the temperature in the room.

This is also why further hikes are not impossible. If activity and inflation refuse to cool, the real rate may have to rise from “barely restrictive” to “actually restrictive.” Markets can live with the first. The second is where equity duration, housing and marginal capex start to argue. The bull case is that productivity from the current investment wave lifts potential growth, so a higher real rate is absorbed. The bear case is that the productivity arrives later than the interest bill. Both can be true on different clocks.

Banks, Energy and the Unfashionable Winners

Fashion is a terrible portfolio manager. For two years the respectable view was that banks were uninvestable and energy was a sunset trade you only held by mistake. Then rates rose, credit stayed mostly calm, and fuel prices firmed. Cash returns followed. You did not need a new theory of capitalism. You needed to notice that net interest margins and commodity prices still pay salaries.

Energy is the cleaner illustration of why this rally is not only a multiple story. When the product price rises and producers do not immediately spend every extra dollar on new supply, free cash flow expands. That cash can fund dividends, buybacks, or balance-sheet repair. Equity holders do not have to imagine a platform in 2032. They can look at this year’s distribution. I still want discipline on supply. A sector that starts believing its own scarcity story usually drills the scarcity away. So far, memory of the last bust is doing some of the risk management.

Banks are messier. Higher rates help until borrowers flinch. Commercial property remains the obvious soft spot, and funding mixes differ wildly from firm to firm. Even so, the sector’s ability to earn its cost of capital has improved versus the zero-rate world, and that improvement is visible in the index, not just in a single regional name. If you are trying to understand why US stocks can rise while yields rise, skipping the financials is how you miss the mechanism.

The Industrial Layer Under the Computing Boom

Every digital story eventually orders something heavy. Transformers. Switchgear. Backup generation. Cooling loops. Concrete. Skilled electricians who are already booked. The firms that sell those inputs have been quiet beneficiaries, and their results are one reason earnings growth has looked economy-wide rather than app-wide.

There is a catch, and it is worth saying plainly. A data-centre order is not the same thing as a data-centre that earns its cost of capital for the tenant. Suppliers can have a great cycle even if some buyers overbuild. That split showed up in prior infrastructure waves. The equipment makers booked the revenue. The asset owners argued about utilisation three years later. Equity investors who own the suppliers should enjoy the backlog and still ask who the marginal buyer is. Equity investors who own the buyers should ask what return on invested capital looks like if power prices stay elevated and chip cycles shorten.

I like this corner of the market more than the slogan attached to it, with a condition. Backlog quality matters more than backlog size. Cancellations, deferred delivery, and customers who want the kit only if someone else finances the power contract are the footnotes that become the story. Read them.

How to Think About Valuation When Both Sides Are Right

Nineteen times forward earnings is not cheap in absolute terms. It is cheaper than twenty-three. Both sentences can sit on the same page without a fight. The useful comparison is not with the lowest multiple of the last thirty years. Those lows arrived with recessions, banking stress, or profit collapses. The useful comparison is with the bond yield you can lock in, and with the growth you can actually underwrite.

A rough way to hold the tension:

• If earnings keep growing at a double-digit clip, a high-teens multiple can work even with firmer yields.
• If earnings growth fades toward mid-single digits, the same multiple will feel heavy next to bonds.
• If growth stays hot and yields rise further, leadership should keep rotating toward firms that benefit from nominal strength.
• If growth cools and yields stay high, the index has fewer friends. That is the awkward quadrant.

Nobody gets to know which quadrant is next. You do get to notice which one is priced. Right now price action says investors will pay for growth, but not at last year’s enthusiasm. That is a healthier setup than a market making new highs on multiple expansion alone. It is not a promise.

Simple hurdle: forward earnings yield versus the bond yield you can actually own. If the gap shrinks while estimate revisions stall, the equity case is getting thinner.

Positioning, Psychology and the Fear of Missing a Melt-Up

Fundamentals are doing real work. So is the fear of being out. After a year in which the index rose 12 percent and the growth benchmark rose about 20 percent, underweight managers do not get patient questions from clients. They get calendars. That flow can extend a move past the point where a cold discounted-cash-flow model would clap. It can also reverse quickly if the next earnings season disappoints, because the same clients who demanded exposure will demand an explanation.

I try not to sneer at that. Career risk is a real price. The practical response is sizing, not prophecy. You can own the profit boom without owning it as if the mid-1990s soft landing and the late-1990s peak are the same trade. They are not. One rewarded patience through a yield shock. The other punished anyone who treated a final rally as a new baseline.

A question I keep asking myself: if the next 10 percent comes from multiple expansion rather than earnings, am I still comfortable? If the answer is no, then new highs are not a reason to add blindly. They are a reason to check what is actually driving the move. Earnings-led highs and multiple-led highs feel identical on a chart. They do not age the same way.

What Could Actually Break the Advance

Not every risk deserves a paragraph. Some deserve a sentence and a calendar reminder. The ones that could genuinely interrupt US stocks, rather than merely bruise a sector, look something like this.

A renewed inflation pulse that forces policy rates well above what earnings models assume. A credit accident large enough to lift bank provisions and tighten lending to the real economy. A stall in the infrastructure orders that have been papering over softer spots in old-line manufacturing. A geopolitical shock that hits energy from the wrong side, spiking input costs without a clean boost to producer profits. Or simply a quarter where the 50 percent earnings comparison starts to lap itself and growth lands closer to ordinary. Ordinary is not fatal. Ordinary at a still-elevated multiple, with bonds offering a real alternative, is how rallies lose their excuse.

Notice what is not on that list: “yields went up a bit.” We have already watched that happen. The market absorbed it because something else, profits, moved more. The break comes if yields rise and profits stop cooperating. Until then, adversity is a headline, not a regime.

A Practical Way to Sit With the Contradiction

You do not have to resolve the 1990s argument this week. You do have to decide what you are actually paid for. If you own a broad basket of US stocks, you are paid, at the moment, for earnings momentum, for some inflation pass-through, and for a private sector that is not choking on interest. You are not paid, in my view, for a permanent 50 percent growth rate or for a world where bonds never compete again.

That suggests a few unglamorous habits. Prefer balance sheets that do not need the credit window to stay polite. Treat capex beneficiaries as cyclical winners, not as utilities with a tech sticker. Let the multiple stay honest. If a holding only works at 30 times because the story is elegant, the story is doing too much labour. And keep a place in the portfolio for the boring competition: yields. The equity case is stronger, not weaker, when you have admitted that bonds are no longer a joke.

There is a version of this tape I respect. Profits are real. Breadth is better than the meme. Leverage in the private sector is contained. Valuations have eased even as prices rose. There is another version I do not want to romanticise. Growth is hot enough to invite tighter policy. The spending wave is concentrated. History’s cheerful chapter and history’s brutal chapter both started with investors explaining why yields did not matter yet.

US stocks have soldiered through the adversity on offer so far. Soldiering is not the same as being invincible. It means the advance has taken fire and kept its shape. Whether it is the mid-cycle repair or the late-cycle party is the question the next few earnings seasons will answer more clearly than any afternoon of yield-watching. Until then, the honest position is neither panic nor parade. It is attention. The denominator has been the hero. Heroes get tired. The market will tell you when this one does, and it will not bother to be subtle.