Where to Focus First
As the Middle East conflict intensifies and global oil prices surge, US Treasury yields have climbed to levels that unsettle stock investors. There is growing concern that pressure currently confined to the bond market could soon spill over into US equities. With shipping through the Strait of Hormuz nearly halted, sparking fears of a global crude supply disruption, international oil prices this week breached the $100 per barrel mark for the first time since May. Although prices have since eased slightly below $100, the rally has amplified worries that the Federal Reserve may need to continue raising interest rates to curb inflation, pushing the 10-year Treasury yield to 4.71%, its highest level since January 2025. This is leading some investors to worry about the short-term outlook for stocks.
So far, US equities are only beginning to feel this pressure. Jack Ablin, Chief Investment Officer at Cresset Capital, noted, "I think investors showed considerable resilience to the initial phase of the escalation. But now, optimism that the situation will ultimately improve appears to be fading." Ablin added, "I view a 10-year yield of 4.75% as a critical threshold." He warned that if the yield surpasses 4.75%, it would start to meaningfully impact stock valuations, as rising yields increase corporate financing costs and compress the valuation of high-priced assets.
Kristina Hooper, Chief Market Strategist at Man Group, also expressed concern about rising rates. "Higher yields could soon become a problem," Hooper said. "The 30-year Treasury yield is now at levels not seen in years, and the period it has spent above 5% is longer than any stretch since 2007. Given inflation pressures, concerns about US fiscal sustainability, and the potential for a prolonged Middle East conflict, yields could certainly move higher." She sees the 10-year yield reaching 5% as a key milestone. "That doesn't mean markets won't feel pressure before we get there, but for me, 5% is a psychologically significant level, and its impact could be substantial," she said.
US stocks have shown better resilience to rising bond yields this year than many investors anticipated. The S&P 500 even hit a record high in early June. Sustained corporate earnings growth, driven by AI-related capital spending, and solid profit outlooks have kept investors optimistic. Strong economic data, including robust retail sales and a stable labor market, have also eased fears of "stagflation."
Matthew Maley, Chief Market Strategist at Miller Tabak + Co, warned in a note, "With Treasury yields hitting new highs for the year, this could soon create headwinds for the market." Rising yields not only make fixed-income assets more attractive relative to stocks but also increase financing costs for consumers and businesses, weighing on economic growth and putting pressure on equities.
The market is heavily reliant on major cloud computing companies (Hyperscalers) fulfilling their ambitious capital expenditure plans, but persistently higher interest rates could disrupt this logic. "The situation for CEOs of these large cloud companies is now different," said Peter Graf, Chief Investment Officer of Amova Asset Management Americas. "If financing costs rise because of higher interest rates, the question of whether their planned massive capital expenditures are still worthwhile becomes a real issue."
However, Graf and other market participants believe it is not yet time to sell stocks. Graf argues that the market's expectations for further Fed rate hikes are too aggressive. The federal funds rate futures market currently prices in about two quarter-point rate increases by year-end. "Based on the data we have, it's not bad enough to push the Fed into a hawkish stance and pour fuel on the fire. I don't see why the Fed would do that right now," he said.
Even with yields at elevated levels, it remains unclear whether the corporate earnings growth trend that has supported the US stock rally is genuinely threatened. "If you can't make a compelling bearish case that $100 oil and $4.50 per gallon gas are enough to destroy the corporate earnings growth trajectory, it's hard to build a bearish argument for the US stock market," said Michael Purves, CEO of Tallbacken Capital Advisors.
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