By Christopher Combs, Chief Investment Officer, Silicon Valley Capital Partners
The U.S. economy continues to demonstrate surprising resilience. Stronger-than-expected employment growth and ongoing economic expansion have pushed Treasury yields higher, with the 10-year Treasury yield moving above 4.53%. While higher yields can create short-term market volatility, the broader economic backdrop remains constructive.
- The Market Is More Concerned About the Speed of Rising Rates Than the Level of Rates
Historically, equity markets have been able to perform reasonably well in environments where interest rates are rising due to stronger economic growth. What tends to unsettle investors is not necessarily the absolute level of interest rates, but the rate of change in yields.
The recent move higher in the 10-year Treasury yield reflects a market reassessing the strength of economic activity and labor market conditions. Rapid increases in yields can temporarily pressure equity valuations and create market volatility, even when the underlying economic fundamentals remain healthy.
- Economic Growth and Corporate Earnings Remain Supportive
The same economic strength that is pushing rates higher is also supporting corporate profits. Employment growth remains solid, consumer spending continues to expand, and business activity remains resilient.
As a result, earnings growth appears positioned to remain strong throughout the remaining three quarters of the year. While higher rates may create valuation headwinds, healthy earnings growth has historically been one of the most important drivers of long-term equity returns.
Consensus economist forecasts continue to assign a relatively low probability of recession, with Bloomberg economist surveys currently implying approximately a 25% recession probability over the coming year—well below levels typically associated with economic contractions.
- Inflation and Rate Expectations Are Moving Higher
Inflation remains above the Federal Reserve’s long-term target and appears likely to drift modestly higher through the remainder of the year. Consensus economist forecasts currently imply that the Personal Consumption Expenditures (PCE) Price Index will average approximately 2.6% through 2026.
As inflation expectations have firmed, interest rate expectations have also shifted. Overnight rate markets now imply fewer rate cuts than previously expected and have begun assigning a meaningful probability that rates could move higher by year-end. Current market pricing suggests roughly a 40% probability of an additional rate increase before year-end.
Despite these market expectations, we believe the Federal Reserve is unlikely to pursue additional rate hikes under a future Federal Reserve led by Kevin Warsh. Policymakers would likely prefer to tolerate inflation modestly above target rather than risk overtightening monetary policy and slowing economic growth unnecessarily.
Conclusion
The recent rise in Treasury yields reflects stronger-than-expected economic activity rather than economic weakness. While rapid increases in interest rates can create short-term market volatility, the combination of healthy job growth, resilient corporate earnings, low recession probabilities, and continued economic expansion suggests the broader economic outlook remains constructive.