This chart shows exactly why investors should worry about rising yields — even if they don’t own any bonds

Investors should be cautious about rising yields, even if they don't own bonds. Strong earnings growth in U.S. companies has propelled stocks to record highs. LPL Financial's analysis reveals that major U.S. companies are projected to report earnings growth of more than 20% for the second consecutive quarter. However, this growth momentum may wane after Nvidia's latest results on Wednesday.

Analysts anticipate that macroeconomic risks, such as rising bond yields, the upcoming U.S. midterm elections, and the ongoing conflict in Iran, will grab investors' attention. The forward price-to-earnings ratio for the S&P 500 has been on a downward trend, indicating that the market's growth isn't matching analysts' earnings estimates.

Additionally, the forward return in excess of the S&P 500 for companies reporting earnings beats has hit a record low. Stocks and bonds have been moving in tandem, with the correlation between the iShares 20+ Year Treasury Bond ETF and the S&P 500 ETF reaching its highest level since 2002. This shift suggests that bond yields are now the driving force in the market.

Jeffrey Buchbinder, chief equity strategist at LPL Financial, notes that the correlation between stocks and bonds tends to change when the 10-year Treasury yield surpasses 4.3%. Higher yields make bonds more appealing and increase the cost of capital for large companies, potentially dampening economic growth. Although the 10-year Treasury yield has peaked at 4.64%, it may decline in the coming months.

Nonetheless, a surge of AI-related bond issuance, along with high oil prices and a resilient economy, could keep yields elevated, prolonging the ongoing battle between rising stock prices and rising bond yields.