While higher rates do discount more of future corporate profits, fast earnings growth can outrun that. Wall Street analysts expect S&P 500 profits to grow 29% this quarter, and are raising estimates, not cutting them. Historically, stocks typically broke down only after long-term yields climbed 2–2.5% (and they’re up just 1.2% since February’s low).What happens if stocks do stumble? Bonds might be the answer. Since 1990, US Treasuries have typically cushioned the impact when stocks fell 5% or more. And if stocks keep rising instead, that’s fine too: history shows that when bond yields start this high, it has usually meant strong five-year returns. A 5% starting yield, plus the diversification bonds provide, is a compelling combination – even if fixed income isn’t the most popular kid in the class right now.

Bond yields have been rising this year due to inflation concerns. But last week, markets' inflation expectations barely moved. The real cause was stronger-than-expected economic data from the US. When the economy is running hot, central banks tend to keep interest rates higher for longer, and companies compete harder for loans to fund growth. Both push up the extra return investors can demand for lending money, even after accounting for inflation.