The 10-year Treasury yield touched 4.80% on Tuesday, its highest level since January 2025. The 30-year sits at 5.28%, close to levels last seen in 2007.
Every framework that has dominated market commentary in recent weeks says equities should be buckling under that.
The S&P 500 – tracked by the SPDR S&P 500 ETF Trust (SPY) – is up roughly 11% for the year and trades at 19.6 times forward earnings, which is cheaper than it was on June 30.
Something in that chain of reasoning is broken.
The reason is hiding in a place that gets less attention than bonds: corporate earnings.
The Second Quarter, By The Numbers
The latest earnings season was impressive, to say the least.
According to FactSet Earnings Insights, the S&P 500 earnings growth reached about 52% year over year, the highest growth rate since 2021.
86% of S&P 500 companies beat earnings estimates and 77% beat revenue estimates, close to historic records.
Even excluding unusually large investment gains at Alphabet Inc. (GOOGL) and Amazon.com Inc. (AMZN), earnings growth remained around 33%.
Corporate America is ignoring the bond panic.
Does NVIDIA Corp. (NVDA), which more than doubled quarterly earnings per share to $2.22 from $1.05, price its data-center backlog off the 10-year?
Does Micron Technology Inc. (MU), which reported $25.11 against $1.91 a year ago, change its capital plan because the benchmark note pays 4.8% instead of 4.3%?
Treasury Yields Are Not Just About Government Debt
There is a popular chain of thought: more government debt means higher Treasury yields, higher yields mean higher discount rates, higher discount rates mean lower equity valuations, and stocks should fall.
In reality, a nominal government bond yield is always the sum of two things.
The first is expected inflation, called the breakeven rate. The second is the real rate, which reflects what investors expect central banks to do and, behind that, how strong the economy is.
The 10-year breakeven sits near 2.35% and the 10-year real rate near 2.44%. Add them, and you get 4.80%, the yield on the 10-year Treasury.
The recent leg higher has come from the real side.
Traders now price in a better-than-65% chance that the Federal Reserve will raise rates on Sept. 16, up from about 36% before Chair Kevin Warsh said Friday that the committee would have work to do if it lacked confidence that inflation was heading to 2%.
Central banks do not tighten into a weak economy. They tighten into an economy running hot, with oil above $90 adding to the pressure.
Nobody Is Talking About Growth
The textbook objection is right as far as it goes. Discount a company's future cash flows and the interest rate sits in the denominator, so a higher rate lowers today's value.
That hits technology and growth stocks hardest, because their cash flows sit furthest out in time.
But there is a numerator in that same equation, and almost nobody talks about it. Productivity, revenue growth, margins and earnings all push it up, and they can push it up faster than the denominator drags it down.
That is exactly what this earnings season is showing.
The forward price-to-earnings ratio has fallen to 19.6 from 20.4 at the end of June, even as the index has climbed. Earnings expectations rose faster than share prices did.
And the growth is not finished. Analysts model 28.2% earnings growth in the third quarter and 25.8% in the fourth.
This is why the market can tolerate a 4.5% or even a 5% Treasury yield.
Yes, a 5% yield matters. It just matters differently when companies are delivering 20%, 30% or 50% earnings growth.
Higher yields turn dangerous when they arrive with weaker growth and falling profit expectations. That is not the tape in front of us.
The bond market is not the enemy of this rally. It is the receipt for the growth underneath it.
