Investing.com — U.S. stocks have historically held up well even as bond yields rise, but a prolonged increase in real Treasury yields above the economy’s underlying growth rate could eventually put pressure on equities, according to BCA Research.
In a report dated Ocober. 5, BCA Research’s chief U.S. investment strategist Doug Peta said the level of interest rates matters more for equity returns than their direction.
Real yields remain below levels that could derail the bull market, but a sustained rise above potential growth could mark a turning point. Historically, the S&P 500 returned an annualized 9.9% when real 10-year Treasury yields rose at least 100 basis points, versus 5.5% when they fell by that amount.
The index’s annualized price return across all periods since October 1948 was 8.2%, BCA’s historical analysis showed.
Why rising bond yields have not derailed stocks
Higher interest rates reduce the present value of future corporate earnings, but BCA Research said their impact on equities also depends on earnings expectations.
Rising real rates often accompany stronger economic momentum and upward earnings revisions, while falling rates can coincide with weaker earnings. The net effect depends on whether changes in earnings or valuation multiples dominate.
Unlike bonds, whose sensitivity to interest rates can be measured through duration, equities respond to numerous interacting factors.
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Historical data show that the S&P 500 delivered an annualized return of 11.8% when real 10-year Treasury yields rose but remained below the economy’s potential growth rate. Returns averaged 8.6% when yields rose from below to above potential growth, and fell to negative 1.3% when yields started and ended above that threshold.
There is no single interest-rate threshold
BCA found that S&P 500 valuation multiples tend to be lower when real yields reach 5.5% or higher. Extremely low yields can support valuations but may also signal deflationary pressures.
Between 2% and 5%, multiples vary widely, limiting the usefulness of interest rates alone as a market indicator.
BCA also found no evidence of investors systematically shifting from equities into bonds when yields rise or the equity risk premium falls. Institutional allocations face regulatory and mandate constraints, while households tend to respond to recent stock-market performance.