Rising Treasury yields cloud U.S. stock market rally despite strong earnings

Rising Treasury yields are beginning to test a U.S. stock rally that has leaned heavily on strong earnings, artificial intelligence enthusiasm and a willingness to pay up for growth. The 10-year Treasury yield finished May 15 at 4.59%, the 2-year at 4.09%, and the 30-year bond moved above 5%, a jump that raises the bar for equity valuations and makes cash and bonds more competitive with stocks.

That matters because rich stock prices can hold up when borrowing costs are low and profits are accelerating, but the math changes quickly when yields climb. Higher rates increase the discount investors apply to future earnings, which hits the most expensive shares first. They also lift financing costs for companies and consumers, creating a broader drag on growth just as the market has been relying on a narrow mix of sturdy earnings and optimism around AI.

The warning has sharpened after a volatile stretch in which the S&P 500 recovered from its late-March low, erased losses tied to the war with Iran and even turned positive for the year. By early May, the index had climbed back to record territory, only to slip again when inflation ran hotter than expected and the fragile U.S.-Iran ceasefire unsettled investors. On May 12, the S&P 500 and Nasdaq both closed lower as traders took money off the table near the end of a strong first-quarter earnings season.

For Paul Karger of TwinFocus, the split between buoyant stocks and rising macro risk is exactly the problem. Karger, TwinFocus’s cofounder and managing partner, said clients keep asking how to square powerful earnings with inflation and oil-price risks. His answer is a barbell approach: large overweight positions in cash, gold and commodities, while still holding megacap growth stocks. TwinFocus says Paul and Wes Karger created the firm in 2006.

The 10-year yield’s May 15 close was its highest since February 2025, a reminder of how quickly the rates backdrop has shifted against equities. If yields keep climbing, the pressure will fall hardest on expensive, long-duration growth stocks that have driven much of the market’s advance, while sectors tied more closely to cash flow and lower valuations may look relatively safer. The rally has proven resilient, but bond traders are signaling that the next phase may be less forgiving.