The 10-year yield topped 4.5% this week while stocks held near records. Traders warn the divergence is unsustainable, with a hot PCE print Friday as the next test.
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The 10-year Treasury yield pushed above 4.5% this week, its highest since November. Stock indexes have largely shrugged off the move. The S&P 500 held near record levels, supported by AI optimism and strong megacap earnings.
That divergence between bonds and equities is a pattern that has historically ended with stocks playing catch-up, several traders said. The yield climb followed stronger-than-expected economic data and a shift in Fed rhetoric. Chair Jerome Powell said last week the central bank needs "greater confidence" that inflation is moving sustainably toward 2% before cutting rates. Markets now price the first full quarter-point cut in September, later than the June start expected at the beginning of the year.
For equity investors, the risk is that higher yields eventually tighten financial conditions and compress valuations. The S&P 500's forward price-to-earnings multiple sits at 21, well above its five-year average of 19. A sustained move above 4.5% on the 10-year could start to erode that premium, analysts at Goldman Sachs said in a note.
The next test comes Friday with the release of the personal consumption expenditures price index, the Fed's preferred inflation gauge.
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