US Treasury yields “breaking 5” test corporate earnings quality, but JPMorgan remains unfazed: stocks will still be the growth engine for investment portfolios

According to Zhitong Finance APP, recently, U.S. long-term Treasury bonds have once again been sold off, with the 10-year U.S. Treasury yield breaking above 5%, reaching its highest level since 2007. As a key anchor for global risk asset pricing, this change is redefining the relative appeal of stocks and bonds. However, J.P. Morgan strategist Grace Peters stated that even though rising bond yields are raising the bar for earnings growth, equities are still expected to climb further.

Why 5% Moves the Market: A Dual Test for Stocks and Bonds

On Thursday, sell-offs in the bond market deepened, pushing the U.S. government’s longest-term Treasury yields to their highest in more than two decades, with the 10-year U.S. Treasury yield reaching levels unseen since July 2007. European yields also rose in tandem.

The reason the 10-year U.S. Treasury yield attracts global attention is not only because it represents the U.S. government's borrowing costs but also because it serves as a crucial risk-free rate benchmark in valuation models for both stocks and bonds. Peters attributes the current upswing in bond yields to three factors: strong growth data, new bond issuance to fund artificial intelligence (AI) infrastructure, and inflation concerns arising from oil prices exceeding $100 per barrel. If these macro headwinds do not subside, the 10-year yield will stubbornly remain high. This typically acts as a negative for equities, but for bonds, it is a double-edged sword.

When the 10-year U.S. Treasury yield surpasses 5%, its status as a safe and higher-yielding income investment makes it more attractive than most dividend stocks and ETFs. The S&P 500's overall dividend yield is only about 1%, while the U.S. Dividend ETF—Schwab (SCHD.US) had a dividend yield of approximately 3% over the past 12 months. Many income investors may sell stocks and switch to short-term Treasury bills.

At the same time, many high-growth stocks are still trading at premium valuations. In a low-rate environment, investors are willing to pay a premium for future growth, and companies can easily borrow to expand; but rising rates compress these valuations, pushing investors towards more conservative assets while increasing borrowing costs. Thus, higher Treasury yields are usually headwinds for high-valuation, growth-oriented tech stocks.

The bond market is also not immune. Higher Treasury yields make newly issued government bonds more attractive to income investors. To stay competitive, corporate bonds must also be issued at higher yields to attract attention, but older bonds issued at lower rates will see their market prices fall as higher-yielding bonds enter the market.

For example, a bond previously issued with a 3% coupon may drop in price from $1.00 to $0.80 per face value dollar as rates rise. For long-term investors, this temporary decline is not significant since holding the bond to maturity will still return $1.00 for each dollar invested; but short-term traders planning to sell before maturity face pressure. While higher interest rates and Treasury yields are less damaging to bonds compared to stocks, they still depreciate old bonds and drive investors toward newly issued high-yield bonds.

Why J.P. Morgan Remains Bullish on Equities

Against the backdrop of high yields, Peters believes fixed income still has a role in portfolios, but it must be carefully selected; comparatively, she is more optimistic about equities and expects the market to usher in an “expanding earnings super cycle.” “Our conviction truly lies with equities, as equities will be the growth engine of the portfolio.”

She pointed out that the stock market has not been complacent about rising yields. The 10-year Treasury yield has moved about 40 basis points this month. “This doesn’t yet amount to a two-standard-deviation move that would really shake up the stock market, but equities are clearly staying alert, and I believe they've already digested a considerable part of the rise.”

Peters expects that current above-trend earnings expectations will be met and may even be revised higher by 2027. She advises investors to focus on companies with pricing power and high visibility of earnings streams.