The escalating interest rate shock is leaving US stocks completely unfazed, and this rare divergence is drawing widespread market attention. The 10-year US Treasury yield has climbed roughly 57 basis points since August 28, bond volatility remains persistently elevated, and oil prices are adding further macro pressure, yet the S&P 500 Index has barely budged and the VIX Index remains at low levels. The traditional linkage mechanism between interest rates and the stock market appears to have broken down.
The core logic supporting US equity resilience may lie in the strength of corporate earnings fundamentals. According to Goldman Sachs data, the S&P 500 Index has gained 13% year-to-date, but consensus expectations for the next 12 months' earnings per share (EPS) have surged 29%, which means the forward price-to-earnings ratio has actually compressed from 23 times a year ago to the current 19 times. Valuation has not expanded; rather, earnings are doing the heavy lifting.
Meanwhile, behind the global bond selloff, the reversal of the yen carry trade is seen as a structural factor that cannot be overlooked. As the Bank of Japan (BOJ) continues to raise interest rates and Japanese bond yields climb higher, the arbitrage logic of borrowing low-cost yen and allocating to higher-yielding overseas assets is unraveling. This force, which once provided additional demand for global sovereign debt, may now be reversing course.
Rate-Stock Divergence Reaches Extreme Levels
The gap between the S&P 500 Index and the 10-year US Treasury yield (inverted) has widened to a level that is historically difficult to ignore.
According to LSEG Workspace data, interest rate swings of similar magnitude have typically dealt a substantial blow to the stock market in the past, but this transmission mechanism appears to have broken down this time. The 10-year yield has risen about 57 basis points since the end of August, yet US stocks have shown unusual resilience.
The previously circulating "cork in water" logic—that the longer the stock market is suppressed, the greater the rebound once rates fall—is still functioning effectively. If yields eventually reverse, how the pent-up upward momentum would be released is one of the most noteworthy potential variables in the current market.
Bond Volatility Stays Elevated, Stocks Turn a Blind Eye
It is not just the absolute level of yields—the gap between bond volatility and equity volatility is equally striking.
The MOVE Index, which measures implied volatility in the bond market, remains at elevated levels, while the VIX Index, though rebounding somewhat from recent lows, is still in a relatively calm range. The extreme divergence between the two means that the panic in the bond market has completely failed to transmit to the stock market.
This is yet another macro correlation signal that US stocks have recently chosen to ignore. The bond market is "shouting loudly," yet the stock market is turning a deaf ear.
Earnings Expansion Compresses Valuation, Providing a Fundamental Shield
US equity resilience may not be purely sentiment-driven—it may have fundamental justification.
Goldman Sachs points out that the S&P 500 Index has risen 13% year-to-date, while consensus expectations for the next 12 months' EPS have surged 29% over the same period. The result of this difference is that the forward price-to-earnings ratio has actually compressed from 23 times a year ago to about 19 times currently.
This data indicates that this stock market rally is not a product of valuation bubbles, but rather earnings growth "doing the heavy lifting." From this perspective, against such a backdrop of severe macro shocks, the stock market's ability to stay flat or even edge higher can itself be interpreted as a sign of strength.
Privorotsky also noted that no matter how optimistic one is about the prospects for artificial intelligence, that optimism has fairly limited actual driving power for the market until energy and interest rate issues are resolved.
Yen Carry Trade Reversal May Be Fueling the Global Bond Selloff
The global bond selloff may have an underappreciated structural root: the large-scale unwinding of the yen carry trade.
Ed Yardeni suggests that for years, ultra-low-cost yen financing allowed investors to borrow yen and allocate funds to various high-yielding assets globally, including sovereign bonds of various countries. This mechanism provided additional demand support for sovereign debt markets against the backdrop of continuously expanding government fiscal deficits.
However, as the Bank of Japan continues to raise rates and Japanese bond yields rise, the arbitrage margin for borrowing low-cost yen to hold foreign bonds is narrowing. The carry trade is being forced to unwind, foreign bonds are being sold off, and capital has an incentive to flow back to Japan.
Yardeni believes this may be one of the important reasons why this round of bond selloff has taken on a globally spreading character: a force that was once a structural buyer of sovereign debt is now turning into a seller at a time when fiscal supply remains enormous. With the double pressure stacking up, it is difficult for the bond market to find relief.
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