The S&P 500 Got Cheaper While It Rallied. Here's What Bond Bears Are Missing

The S&P 500 reached new heights on Tuesday due to a jump in corporate earnings growth, despite rising 10-year Treasury yields. The bond market is not the culprit of the rally, but rather the evidence of strong corporate earnings. The latest earnings season has been remarkable, with a 52% year-over-year increase, the highest since 2021.

86% of S&P 500 companies beat earnings estimates, and 77% beat revenue estimates. Despite these strong results, some market observers still argue that rising yields will lead to lower equity valuations. However, the reality is that corporate earnings growth is outpacing the impact of higher interest rates. The nominal government bond yield is a combination of expected inflation and the real rate, which reflects investors' expectations for central bank policy and economic strength.

The recent increase in the 10-year real rate is due to traders' belief in the Federal Reserve's plan to raise rates in September. Nevertheless, there is still significant upside potential for corporate earnings growth, which can absorb the impact of rising interest rates.