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High and rising yields no barrier to higher stocks

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Stocks have fallen as much as 10% since July as bond yields have shot up sharply, but beyond that immediate correction, the outlook is more encouraging

Fears that high and rising Treasury yields will pummel Wall Street are understandable, but ultimately misplaced – history shows that the link between yields and stocks ranges from patchy at best, to non-existent.The third-quarter earnings season under way shows profit growth of around 5%, while the bullish 2024 outlook has held up firmly – analysts are still pencilling in earnings growth of around 12%.

“Over the past 60 years there is basically no relationship between the average level of yields and S&P 500 returns, at least at a quarterly frequency,” says Stuart Kaiser, head of equity trading strategy at Citi.The chart below from Kaiser and his colleagues shows the relationship between average quarterly S&P 500 returns and average 10-year yields every quarter going back to 1962. If there is a pattern, it is almost impossible to spot.

Slicing the data in a slightly different way, Cox calculates that there have been 50 three-month periods since 1962 where the 10-year yield has risen half a percentage point or more, including the August-October period this year.

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