DISCLAIMER: GoldInvestors.news is not a registered investment, legal or tax advisor or broker/dealer. All investment/financial opinions expressed by GoldInvestors.news are from the personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur.

The S&P 500 remains roughly 2% below its all time closing high, even as Treasury yields climb to levels that would normally rattle equity investors.

That resilience raises a pressing question for Wall Street: Why have higher borrowing costs failed to crush the stock rally?

The answer may be found in corporate profits rather than the bond market alone.

Jeff Schulze, head of economic and market strategy at ClearBridge Investments, said equities have focused on the strength beneath company balance sheets.

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"The markets that have been taking their cues from the … strong earnings environment that we've seen," Schulze told Yahoo Finance.

Earnings for companies in the S&P 500 surged 52% from a year earlier during the second quarter, providing substantial support for elevated stock prices.

That profit growth has given investors a reason to tolerate yields that might otherwise make bonds more attractive than stocks."

I think that that's going to continue, and we're going to see positive market momentum," Schulze added.

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Historical market patterns also favor the bulls after a strong opening stretch.

ClearBridge found that powerful gains through August have typically been followed by additional advances during the final four months of the year.

"When the S&P 500 has gained more than 10% through August, it has advanced from September through December in 25 of 28 instances, an 89% positive hit rate," Schulze and his team said in a recent note. While history offers no guarantees, that record is difficult for investors to ignore.

Stocks have still shown signs of strain, with the S&P 500 slipping from its middle August peak and four sessions during the latest week ending in negative territory.

Meanwhile, the 10 year Treasury yield reached its highest level since 2023 as oil prices surged.

Yet the source of the yield increase matters as much as the increase itself.

Schulze said the latest move has been driven mainly by higher real rates, which measure interest rates after adjusting for inflation, rather than by a dramatic deterioration in inflation expectations.

Stronger economic growth, enormous spending on artificial intelligence infrastructure, and a reassessment of the Federal Reserve's policy path have all contributed to higher real rates.

That combination looks considerably different from a bond market revolt triggered by runaway prices or collapsing confidence in Washington's fiscal discipline.

"If current yields were signaling a material threat to the economy, stocks would likely be much lower due to a corresponding reduction in earnings expectations," Schulze wrote.

Instead, analysts continue to see enough earnings strength to keep equity valuations from unraveling.

The numbers help explain the distinction. Since the market lows in late February, real rates have increased by 50 basis points, while inflation expectations have climbed only 15 basis points and the term premium has risen 17 basis points.

The 10 year Treasury yield stood at 4.93% on Friday, while the 30 year yield hovered near 5.33%.

Those levels increase financing costs for households and businesses, particularly through mortgages and other longer term loans, but they also suggest that fixed income markets are escaping years of artificial suppression.

"I think the equity market is reading the situation properly," Schulze told Yahoo Finance.

He added, "I really think that we're just normalizing fixed income markets after a really depressed period that we saw coming out of the global financial crisis."

Following the 2008 financial crisis, central banks pushed interest rates close to zero and held them there for years in an effort to stimulate economic activity.

That extraordinary policy rewarded borrowers, punished savers, distorted the price of risk, and encouraged investors to pour money into equities in search of acceptable returns.

Today's higher yields therefore may represent normalization rather than an immediate warning of economic collapse.

Even so, investors cannot dismiss the pressure that expensive credit eventually places on housing, corporate investment, federal interest costs, and richly valued technology shares.

The Federal Reserve now presents the next major test for markets. Traders have priced in a 25 basis point rate increase, with the estimated probability near 90% after "core" inflation rose more than economists expected during the latest month.

For now, strong profits and durable growth expectations are overpowering the threat from the bond market. S

tocks could remain resilient if yields are rising because the economy is productive, but that calculation would change quickly if inflation accelerates or earnings forecasts begin to crack.

DISCLAIMER: GoldInvestors.news is not a registered investment, legal or tax advisor or broker/dealer. All investment/financial opinions expressed by GoldInvestors.news are from the personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur.