Rising yields can leave stocks unruffled

As government bond yields climb to fresh multi-year highs and expectations for policy rates continue to rise, investors are increasingly questioning how much further equities can withstand the pressure.

"Our view remains that the equity rally can continue despite tighter Fed policy," a research note from UBS Wealth Management’s chief investment office says.

"Stronger profits have reduced equity valuations relative to earnings, making markets less vulnerable to a substantial correction caused solely by higher yields," it adds.

"Meanwhile, AI remains a structural tailwind, and recent corporate results continue to validate strong demand for cloud capacity and AI infrastructure."

The bank forecasts S&P 500 earnings will grow by 25% in 2026 and 14% in 2027, while euro zone earnings are expected to rise by 15% in both years.

Data signal a slowdown in disinflation rather than a renewed inflation surge, with economic resilience helping cushion the impact of moderately higher rates.

UBS flags that largest contributions to U.S. inflation came from volatile categories, while more persistent housing components were relatively benign.

Recent figures showed the economy remains strong, while the “Fed’s model suggests that 50 basis points of additional tightening would reduce economic growth by only a few tenths of a percentage point.”