Bond Yields Rise and Corporate Profits Sit Next in the Line of Fire

Rising bond yields reach corporate profits through two routes, first by raising the opportunity cost of owning growth stocks and then by squeezing the household incomes that drive company revenue. U.S. equity markets have leaned heavily on a small group of mega-cap technology and semiconductor stocks, even as long-dated Treasury yields climbed toward levels last seen around the 2007 highs. That combination leaves the S&P 500 exposed on two fronts at once, because stretched valuations and softer earnings can stem from the same source. It is why the bond market now matters as much to stock investors as it does to bondholders.

Fawad Razaqzada, StoneX Media Market Analyst, has more than 12 years of trading and analysis experience across forex, indices, commodities and cryptocurrencies. He combines macroeconomic and technical analysis in his coverage of U.S. equity indices and the bond market, the two markets where the link between Treasury yields and stock valuations plays out.

Key Themes

• Around 52% of S&P 500 stocks traded below their 200-day moving averages while the index sat near its record.
• The 30-year Treasury yield is testing levels last seen around the 2007 highs, on the verge of the financial crisis.
• Higher bond yields lift mortgage costs and cut household disposable incomes, a chain that reaches corporate revenue and profits.

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Treasury Yields Raise the Opportunity Cost of Growth Stocks

Rising U.S. Treasury yields lower the value investors are willing to place on future earnings, and growth stocks feel that shift first. The 30-year Treasury yield has been testing levels last seen around the 2007 highs, when markets stood on the verge of the financial crisis, and that backdrop weighs most on companies whose appeal rests on profits that are still years away. Why accept the uncertainty of distant earnings when government bonds pay more simply to wait? The question is sharper for an S&P 500 rally that has relied on a small group of mega-cap technology and semiconductor stocks, since concentration leaves the index more exposed to any repricing in those names. Specifically, the risk builds when equity valuations were already stretched before bond yields began to climb. "Higher long-term yields increase the opportunity cost of holding growth stocks, particularly when valuations are already elevated," Razaqzada says.

Mortgage Costs Carry Bond Yields Into Corporate Profits

"Rising yields will also push up mortgages and cause a drop in household disposable incomes." Higher bond yields travel from the Treasury market into household budgets, and from there into U.S. corporate profits. When more of each paycheck goes toward a mortgage, less is left for the goods and services that make up company sales. According to Razaqzada, that squeeze "could lead to lower economic output and ultimately hurt corporate profits and revenue as well". Corporate profits therefore sit at the far end of the transmission line from bond yields, reached only after households and the wider economy absorb the hit. For equity investors, the result is a second channel of pressure that follows the valuation effect rather than replacing it.

 

--- Written by Gus Farrow, Senior Manager, StoneX Media

--- Expert: Fawad Razaqzada, StoneX Media Market Analyst