For much of 2026, the global bond market has been sending a message that historically would have rattled equity investors. The 30-year US Treasury yield has stayed above 5%, a level last touched in 2007. In Germany, Japan and the United Kingdom, government borrowing costs have climbed to multi-decade highs. By conventional logic, this should be a drag on shares: higher yields raise the cost of capital, reduce the present value of future earnings, and offer investors a safer alternative to stocks.
Yet equities have barely flinched. The S&P 500 is up roughly 13% this year and sits less than 1% below its August record. Europe’s STOXX 600 has gained about 9.5%, while Japan’s Nikkei 225 has surged more than 27%. The puzzle is not whether yields are high, but why they are rising—and the answer may lie in the strength of the underlying economy.
Growth, not inflation, is driving yields
John Williams, president of the New York Fed, offered a key clue this week. Speaking to CNBC, he said the rise in long-term yields is largely a reflection of a robust US economy and heavy investment in artificial intelligence and data centres. “What’s driving it…is really a strong U.S. economy and a strong economic outlook fuelled by big investments in AI and data centres and technology in general,” Williams said.
That distinction matters for investors. If yields climb because growth expectations are improving, companies are likely to see stronger revenues and profits. Higher financing costs become a headwind, but rising earnings can offset much of that pressure. Williams was explicit: “It’s more about the economy affecting financial conditions,” rather than the reverse.
Fed Chair Kevin Warsh made a similar case at Jackson Hole on 28 August. He noted that real consumer spending had increased by more than 2% over the previous four quarters, and that private domestic final purchases—a measure combining consumption and investment—had risen at almost a 3% annual pace during 2026. The labour market, he said, remains stable: “The jobless rate, at 4.1 percent, remains low by historical standards and has not changed much for a couple of years.”
Most strikingly, Warsh said: “On balance, I would be hard pressed to describe broad financial conditions as restrictive.” That is a remarkable statement in an environment where long-term borrowing costs have risen sharply. It suggests that higher yields have not yet translated into the kind of financial tightening that would normally threaten the economic cycle.
Record earnings provide a cushion
The strongest support for equities is arithmetic. According to FactSet’s Earnings Insight published on 28 August, with 97% of the S&P 500 having reported second-quarter results, 86% beat earnings estimates and 77% beat on revenue—both above their five-year and ten-year averages. Blended earnings growth for the quarter stands at 52%, the fastest since the second quarter of 2021. Revenue grew 15.5%, and the net profit margin reached 17%, the highest FactSet has recorded since it began tracking the measure in 2009.
That earnings boom is not confined to the United States. European companies have also posted solid results, helping the STOXX 600 stay near record highs. The resilience of corporate profits gives investors a reason to look past higher discount rates.
Bond vigilantes are not panicking—yet
Ed Yardeni, the economist who coined the term “bond vigilantes” in 1983, is not sounding the alarm. The 10-year Treasury yield remains broadly within his 4%–5% “old normal” range, which he says characterised the period between the pre-financial-crisis years and the pandemic. He also notes that the yield remains below nominal US GDP growth. “We’ll worry about the government’s debt when the Bond Vigilantes do,” Yardeni wrote.
That does not mean investors should ignore rising yields. The critical threshold may not be a specific number like 5%. The bigger warning would come if yields continued rising while economic growth weakened, earnings estimates fell, and inflation expectations accelerated. That combination—higher discount rates and lower profits—is what stocks fear most.
For Europe, the stakes are similar. European bond yields have hit 15-year highs as the global sell-off deepens, and the impact on mortgages and public spending is already being felt. Rising yields raise borrowing costs for governments and households, which could eventually weigh on consumption and investment. But for now, the economic data across the eurozone, while softer than in the US, has not collapsed.
The real test comes on 16 September, when the Federal Reserve meets for the first time since Warsh told the world that policy is not restrictive. If the Fed signals that rates will stay higher for longer, markets will have to decide whether the earnings cushion is thick enough. The lesson of 2026 so far is that the level of yields matters less than what sits next to them. Instead of asking whether higher bond yields are automatically bad for stocks, investors should ask what is driving them. If yields rise because productivity, investment and growth are strengthening, equities can absorb the shock. If they rise because governments are losing control of inflation and debt markets are demanding compensation for greater risk, the story changes completely.
