US stocks have been under pressure as US bond yields continue to rise above 5%. Both the 10-year and 30-year US Treasury yields have surged past 5%, hitting multi-decade highs. And there is no relief in sight. Oil prices show no signs of reversing their upward trajectory, and the US Fed is expected to keep hiking rates in the months ahead.
So are stocks cracking? Not quite. US stocks have kept climbing even as interest rates have moved higher. The three leading indices, the S&P 500, the Dow 30 and the Nasdaq 100, are near all-time peaks and showing no signs of weakness. The US market is up roughly 12% to 15% this year.
But can equities keep defying gravity? Morgan Stanley Wealth Management says yes, for now. But the risks are getting harder to ignore. The view comes from Lisa Shalett, Wealth Management Chief Investment Officer, based on her Global Investment Committee presentation this month.
Why Stocks Still Have Room to Run
The bull case rests on earnings. Corporate profits through the second quarter grew at a robust pace from a year earlier. Profit growth for the S&P 500 Index in 2027 is still poised to be healthy, says Shalett.
AI is the other engine. Companies are spending heavily on computing power, data centres and infrastructure. That spending is supporting technology, manufacturing, energy and industrials.
The rally is also widening. Investors are no longer rewarding only the largest tech companies. Energy, health care, financials, companies adopting AI and differentiated tech leaders have all helped. The market looks less top-heavy and equities look more rationally priced than earlier in the cycle.
Is the Bond Market the Real Test?
The biggest risk may sit in bonds. Stocks have absorbed higher yields so far. The key question for 2027 is whether rising rates and renewed inflation pressure start to weigh on equity valuations and earnings. “Higher bond yields, elevated oil prices, policy uncertainty and strain among lower-income consumers could test the rally as we move toward 2027,” says Shalett.
Three forces are pushing rates higher
Middle East tensions, including concerns around the Strait of Hormuz, have lifted oil prices. That can keep inflation alive and push yields up. Renewed tariff discussions, especially around China, add to the risk.
The Federal Reserve is another factor. New Fed Chair Kevin Warsh appears to favour decisions based on incoming data, rather than signalling plans far in advance. Investors may be less sure that the Fed will step in quickly to ease conditions during volatility.
Policy uncertainty is adding pressure too. When investors are unsure about government policy, they often demand extra return to hold longer-term Treasury bonds. Recent efforts by Treasury Secretary Scott Bessent to influence currency markets and borrowing costs have drawn fresh attention to the sustainability of US debt and deficits. They appear to have heightened concern rather than calmed it.
Are Consumers Running Out of Room?
After inflation, incomes have barely grown. Everyday costs remain a strain. Lower-income households are showing more stress, with rising delinquencies in auto loans, student loans and credit cards.
That does not mean the consumer is falling apart. It does mean the economy leans more heavily on continued hiring and wage growth to sustain spending. The stock market, meanwhile, increasingly relies on earnings growth to drive returns. Put the two together, and there is less room for disappointment.
What Should Investors Do Now?
Morgan Stanley’s Global Investment Committee suggests investors keep favouring stocks. It prefers high-quality US large-cap companies that generate reliable cash flow. It advises avoiding smaller, lower-quality stocks after their recent run. It also suggests complementing US equities with exposure to emerging markets and Japan.
In fixed income, investors may want to stay cautious overall. They may also avoid taking a major position on interest-rate moves, given uncertainty around inflation.
Stocks and bonds have been moving together more often. Some investors may therefore want diversifiers such as hedge funds, commodities, gold, real estate, infrastructure and select private markets.
Disclaimer: This article is for informational purposes only and should not be treated as investment advice. Please consult a qualified financial advisor before making any investment decision.