US Treasury yields "breaking 5" test the quality of corporate earnings, but JP Morgan remains unmoved: stocks will still be the growth engine of investment portfolios.

Title context: US Treasury yields "breaking 5" test the quality of corporate earnings, but JP Morgan remains unmoved: stocks will still be the growth engine of investment portfolios. Text: Recently, long-dated US Treasury bonds came under renewed selling pressure, with the 10-year Treasury yield breaking above 5%, the highest level since 2007. As a key anchor for global risk asset pricing, this shift is redefining the relative appeal of stocks versus bonds. However, JPMorgan strategist Grace Peters said that even though rising bond yields are raising the bar for earnings growth, stocks are still expected to continue climbing. Why 5% Moves the Market: A Dual Test for Stocks and Bonds On Thursday, the bond selloff deepened further, with the longest-dated US government bond yields rising to the highest in more than two decades. The 10-year Treasury yield stood at a level unseen since July 2007, while European yields also moved higher in tandem. The reason the 10-year Treasury yield moves global markets is not only that it represents the US government's funding cost, but also because it is a key risk-free rate benchmark in stock and bond valuation models. Peters attributed the drivers of this round of rising bond yields to three factors: strong growth data, new debt supply entering the market to finance artificial intelligence (AI) infrastructure, and inflation concerns triggered by oil prices above $100 per barrel. If these macro headwinds do not fade, the 10-year yield will remain stubbornly high. This is usually bearish for stocks, while for bonds it is a double-edged sword. When the 10-year Treasury yield rises above 5%, it becomes more attractive as a safe, higher-yielding income investment than most dividend stocks and ETFs. The S&P 500's blended dividend yield is only about 1%, while the Schwab US Dividend Equity ETF (SCHD.US) had a dividend yield of about 3% over the past 12 months. Many income-oriented investors may sell stocks and shift into short-term Treasury bills. At the same time, many high-growth stocks are still trading at premium valuations. In a low-rate environment, investors are willing to pay a premium for their future growth, and companies can easily borrow to expand; but rising rates compress valuations, push investors toward more conservative assets, and drive up borrowing costs. Therefore, rising Treasury yields are typically a headwind for high-valuation growth tech stocks. The bond market is also finding it hard to remain unaffected. Higher Treasury yields make newly issued government debt more attractive to income investors. Corporate bonds, in order to keep pace with Treasuries, also need to be issued at higher yields, thereby drawing more attention. But the market prices of older bonds issued at lower rates will fall, because higher-yielding bonds are entering the market. For example, a bond previously issued with a 3% coupon could see its price per dollar of face value fall from $1.00 to $0.80 as rates rise. For long-term investors, this temporary decline does not matter much, because holding to maturity will still return $1.00 per dollar; but short-term traders planning to sell before maturity will face pressure. Higher rates and Treasury yields hurt bonds less than stocks, but they still erode the value of old bonds and push investors toward newly issued higher-yield bonds. Why JPMorgan Still Sticks With a Bullish View on Stocks Against the backdrop of elevated yields, Peters believes fixed income still has a place in portfolios, but it must be carefully selected; even so, by comparison, she is more bullish on stocks and expects the market to enter an "expanding earnings supercycle." "Our conviction is indeed in stocks, and stocks will become the growth engine of investment portfolios." She pointed out that the stock market has not been complacent about rising yields. The 10-year Treasury yield has moved about 40 basis points this month, "which is not yet enough to really stir the stock market at a two-standard-deviation level, but stocks will clearly remain alert, and I think they have already digested a large part of it." Peters expects that currently elevated earnings expectations will be met and could be further revised upward when looking ahead to 2027. She advises investors to focus on companies with pricing power and high visibility in earnings streams.