Could the rapid rise in yields
end the bull market for stocks?

Key takeaways:

• Stocks have started 2025 mired in a trading range as investors debate the factors behind the rapid rise in long-term interest rates.
• Rising interest rates don't necessarily prevent stocks from performing well, as stocks have historically delivered gains across various interest-rate cycles.

January 23, 2025 – The yield on the 10-year U.S. Treasury note, a benchmark for long-term interest rates, has increased by over 100 basis points since the Federal Reserve lowered the Fed funds target rate in September. Meanwhile, the U.S. equity market has started 2025 stuck in a trading range as investors debate the reasons behind the rapid rise in yields.

Popular opinion among both bullish and bearish investors has coalesced around various factors, including a rising term premium, fiscal policy concerns, and resilient economic growth. The latter has prompted a more hawkish response from the Fed, signaling a slower pace of monetary policy easing to come.

With the significant rise in long-term yields since the September Fed rate cut, some market participants are concerned about the potential impact on equity markets, especially if rates continue to rise or remain at current levels. This concern is even more pronounced among investors who lack historical context on the impact of rising rates and the ability of equity markets to deliver positive returns.

Investors who have only experienced low interest-rate environments—especially since the Global Financial Crisis of 2007-09—may not realize that rising interest rates do not necessarily prevent stocks from performing well, as shown in the accompanying chart. While higher rates compete with equities, historical data shows stocks can deliver gains through different interest-rate cycles.

When interest rates rise or revert toward historical averages, performing equity markets largely depends on the broader economic context, which explains the current debate between market bulls and bears. Rising rates because of inflationary concerns act as a headwind for equities, as in 2022. Conversely, if an improving growth outlook is driving the current rise in yields, it should also support corporate profits, creating a favorable backdrop for equities.

While every market cycle is different, and the current cycle has certainly been discordant over the past few years, if the recent rise in yields is because of supportive economic fundamentals—as the weight of the evidence suggests—then rising rates are unlikely to derail the current bull market.