Treasury yields rise threaten stock rally

U.S. stock investors are warily watching the rise in Treasury yields as a potential stumbling block for Wall Street's record-setting rally, with particular concern if the benchmark 10-year yield jumps abruptly toward 5%. The 10-year Treasury yield has risen over 80 basis points since March to 4.79% late on Tuesday, yet the S&P 500 is up more than 11% in 2026. Stocks fell on Tuesday as yields rose, but the S&P 500 remains about 2% below its August 13 record high. The rise in yields stems from worries about inflation, the ballooning fiscal deficit, and a solid economic backdrop. A sell-off in global bond markets deepened on Tuesday as oil prices jumped after renewed U.S.-Iran attacks, while markets factored in higher odds of near-term U.S. interest rate hikes following a speech from new United States — Federal Reserve Chair Kevin Warsh. Strategists at BlackRock noted sticky inflation and heavy government borrowing give little reason for pressure on yields to fade. The 10-year yield last reached 5% in October 2023, a period that coincided with broad stock weakness. Higher yields reduce the allure of future profits in equity valuation models, and the current market could be more sensitive given the extent of equity performance tied to AI investments. The S&P 500's forward price-to-earnings ratio stands at 19.7, above its long-term average of 16, and further increases in yields could pressure valuations. Investors say the increase in yields has been orderly so far, but a sharp backup in rates could severely punish forward multiples.