Rising Treasury Yields Haven’t Cracked the Bull Market…Yet
The stock market has been rattled by the sharp rise in bond yields over the past month, but the bullish trend in equities has so far bent rather than broken. That resilience will likely be tested if yields continue climbing, a scenario that will largely hinge on the path of energy prices and inflation in the weeks and months ahead.
If investors are worried that stocks are vulnerable at this stage, it’s not obvious from the price trends in various market benchmarks. The SPDR S&P 500 ETF (SPY), for example, is trading near a record high, and recent volatility, so far, looks normal by historical standards.
Looking at the market through a factor lens tells a similar story. Notably, the key equity factors underpinning this year’s stock market rally remain largely intact. Until these corners start to crack, the recent weakness appears more consistent with a pause in the uptrend than the start of a prolonged correction.
On a year-to-date basis, not much has changed, based on a set of equity-factor ETFs through Friday’s close. Despite surging Treasury yields in recent weeks, the winning factors that have prevailed for much of 2026 continue to lead. Notably, the high-beta (SPHB) and momentum factors remain on track to outperform the rest of the field by a wide margin this year.
Some of this year’s bellwether leaders, including large-cap growth (IVW), rallied to new highs last week.
Most of the caution stemming from higher interest rates is currently being expressed through small-cap and defensive factors. Although the iShares Core S&P Small-Cap ETF (IJR) rallied sharply on Friday, the one-day rebound barely begins to reverse the fund’s deteriorating trend profile over the last two months.
A similar downshift has been playing out in the high-dividend factor (VYM). High-dividend stocks are often used as a gauge of defensive sentiment because investors tend to favor their stable income streams and relatively resilient business models when uncertainty rises. But recent market action suggests that the search for a safe harbor within equities has become less compelling lately.
Another measure of overall risk tolerance is the ratio of the broad market (SPY) to the low-volatility factor (USMV). This subset of the market is often used as a gauge of defensive positioning because investors tend to favor its historically steadier returns and lower downside risk when market uncertainty increases. The chart below highlights that the SPY:USMV ratio continues trending higher, suggesting investors remain inclined toward risk-taking and are largely downplaying concerns that interest rates and inflation will move materially higher from here.
The market’s implied forecast that downplays macro threats could be wrong, of course. But for now, the market’s underlying signals remain more supportive than cautionary.
The fuel powering the bull market is ultimately tied to corporate earnings, and a stumble on that front could present a deeper challenge to the bullish narrative. But as FactSet notes, the trend remains favorable. “Estimated earnings for the S&P 500 for the third quarter are higher today compared to expectations at the start of the quarter,” writes analyst John Butters. “In addition, the index is expected to report earnings growth above 25% for the third-straight quarter.”
Rising bond yields have undoubtedly complicated the outlook for equities, yet the market’s leadership profile continues to send a constructive message. As long as earnings data support the bullish outlook, high-beta and momentum strategies are likely to remain in favor.
Another source of optimism is resilient U.S. economic growth. The Atlanta Fed’s GDPNow model is nowcasting that the government’s initial estimate for third-quarter GDP, due later this month, will show a solid improvement from Q2.
For now, the bulls appear inclined to view higher yields as a byproduct of a strengthening economy rather than a warning sign for risk assets. There are good reasons to treat that narrative with caution. But until cracks begin to emerge in either earnings or economic growth, investors seem willing to grant the bull market the benefit of the doubt and keep climbing the wall of worry.
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