Societe Generale's Alain Bokobza warns a 10-year Treasury yield of 5.5 percent would be the tipping point where earnings growth can no longer support equity valuations, with the current 4.8 percent level leaving stocks in a sensitive 4.78-to-5.5 percent zone.
A 10-year Treasury yield near 5.5 percent would strip away the earnings growth that has kept equity valuations intact, Societe Generale warns, flagging the level as the point where stocks come under sustained pressure.
"Stocks are not more expensive than they were at the start of the year," Alain Bokobza, head of global asset allocation at Societe Generale, said in an interview. "But 5.5 percent is the tipping point where earnings upgrades can no longer support valuations — above that, equities will start to feel the pressure."
The 10-year yield stood at 4.8 percent with cash markets closed for the US Labor Day holiday. Bokobza traces the climb to a structural rise in nominal GDP that began in the early 2020s, driven by fiscal expansion in Germany and Japan, persistent inflation and surging capital demand from AI infrastructure buildout. He sees no near-term reversal.
The 4.78 percent-to-5.5 percent band now forms the most sensitive zone for the equity-bond relationship. JPMorgan's Grace Peters said a break above 5 percent would carry psychological weight and could trigger a stress reaction in stocks, while Barclays' Emmanuel Cau said such a move would make investors markedly more cautious on equities.
What's pushing yields higher
The recent leg higher reflects a confluence of forces. Escalation in the US-Iran conflict has pushed oil prices up and reignited inflation concerns, while hawkish signals from the Federal Reserve and the European Central Bank have added upward pressure on yields and dampened equity sentiment. Fiscal deficit worries and the AI capital expenditure boom, which intensifies competition for capital, have compounded the move.
Bokobza frames the rise as a fundamental shift rather than a single monetary policy variable. Fiscal expansion in Germany and Japan, sticky inflation and the capital demands of AI infrastructure have combined to lift the nominal growth trend, embedding higher yields in the medium term. From this view, the pressure on equities is not a fleeting episode but a gradual stress test that plays out while yields hold at elevated levels.
Why earnings support has limits
Global earnings expectations have been revised up substantially this year, and that upgrade cycle is what has kept equity risk premiums from collapsing even as yields climbed. Bokobza said this buffer is the reason stocks have not repriced sharply so far.
Yet the cushion is finite. He expects the Fed and the ECB to deliver only limited further hikes — moves too small to break the current economic cycle or meaningfully curb inflation expectations. That keeps a systemic equity crash off the table in his base case, but it also means valuations will face persistent pressure as long as yields stay high.
The dynamic echoes the repricing that followed the Fed's 2024 easing cycle, when a 100-basis-point run of cuts through December failed to anchor long-end yields as fiscal and inflation concerns kept term premiums elevated. Long-duration growth stocks, whose valuations are most sensitive to the discount rate, would bear the brunt of any sustained move toward the top of the range.
For investors, the zone between 4.78 percent and 5.5 percent is where the equity-bond relationship will be tested most acutely. A sustained move toward the top of that range, driven by the structural forces Bokobza identifies, would leave earnings growth with little room to absorb the rising discount rate.
This article is for informational purposes only and does not constitute investment advice.
