US stocks are rallying even as bond yields climb: What it means for Indian investors

The September rate hike may have been discounted by the market as well. “This is more of a relief bounce than a new rally, as the hike was largely expected,” says Viram Shah, Founder and CEO, Vested.

“What unsettled markets was the tone, with 16 of 19 Fed officials pencilling in one more hike this year. Since then, two things have eased: Brent has cooled from above $109 to around $101, and the 10-year yield has slipped back just under 5%. Add steady buying in AI and large tech names, and stocks are finding support,” adds Shah.

As of Tuesday, the 10-year note is inches below the 5% yield mark, at 4.98%, while the longer-duration 30-year bond trades at 5.3%.

Yardeni Research has also pointed out the growing differential between yields and stocks: “Central banks raising rates, bond yields climbing globally, yet stocks keep rallying on rising earnings forecasts. The disconnect is holding.”

What History Says About Stocks After A Fed Hiking Cycle Begins

Investors should also look at how markets have reacted to rate hikes in the past. The good news is that long-term investors need not panic. According to a recent Goldman Sachs Research report, US stocks have historically seen short-term losses when the Federal Reserve initiates a cycle of rate increases, but a year after interest rates start to rise, stocks usually see gains.

Not Every Sector Will Feel Higher Yields The Same Way

Financial firms are among the many industries that typically profit from rising interest rates. However, AI stocks have demonstrated a slight negative correlation with real yields, similar to the information technology industry as a whole.

Still, the broader equity market may not react to higher bond yields uniformly. Not all stocks and sectors face the same pressure, or comfort, from rising yields.

Why AI Stocks Could Take The Biggest Hit

AI-led stocks may be hit the most. Rising yields have an especially negative impact on high-growth, low-current-profit businesses because their valuations primarily rely on projected future cash flows rather than current earnings.

Compared to businesses making steady profits now, an increase in yields considerably lowers the present value of future cash flows when discounted to the present.

The one silver lining is if investors take a more cautious approach. According to a recent Goldman Sachs Research report, a company can maintain its valuation as interest rates rise if investors see it as less risky, assign it a lower equity risk premium, or expect it to grow faster.

“Within equities, richly valued growth stocks and companies carrying heavy debt feel it first. Businesses with strong cash flows and pricing power tend to hold up better. So expect wider gaps between markets and sectors, instead of one broad move in either direction,” says Shah.

In short, this isn’t a market moving in one direction together; it’s one splitting apart by sector and balance sheet strength.

What This Means For Indian Investors Holding US Assets

For Indian investors with exposure to US markets, the move in Treasury yields matters in three ways, according to Shah.

First, valuations. Higher yields reduce the present value of future earnings, so growth-heavy portfolios, which many Indian investors hold, will see bigger swings.

Second, choice. US Treasuries and short-term Treasury ETFs now yield roughly 4.7 to 5% in dollars, a real option for the conservative part of a global portfolio, which was not the case a few years ago.

Third, currency. With the rupee near 96 to the dollar, existing US holdings have gained in rupee terms, but every new remittance buys fewer dollars.

Taken together, Shah suggests investors weigh valuation risk, income opportunities and currency impact as one connected picture, not three separate decisions. “Investors should look at all three together,” he says.

Is The Old Playbook Breaking Down?

The way equities are performing against bond yields is not playing out as per the book. Typically, equities perform well in low-rate environments, but currently, stocks are rising despite high yields.

The threat to equities is far from over if yields remain elevated above 5% or move towards 6%, making the pressure on valuations tough to ignore. Morgan Stanley strategists in a recent note have called out the risks loudly, saying US equities are vulnerable to a further increase in energy prices and bond market volatility, and see the S&P 500 Index dropping as much as 7% in such a scenario, reports Bloomberg.

Disclaimer: This article provides factual analysis only and is not, and should not be construed as, an offer, solicitation, or recommendation to buy or sell securities. Investment in foreign securities involves significant risks, including currency fluctuations, different financial reporting standards, and varying regulatory environments. The views expressed by market strategists and analysts in this article are their own and do not constitute investment advice. Readers are advised to consult a qualified financial advisor before making any investment decisions.