Rising bond yields are challenging the equity momentum rally

Overview

The report discusses why global equities have continued to hit new highs despite the ongoing closure of the Strait of Hormuz, a deteriorating growth-inflation mix, and rising bond yields. The core explanation is strong earnings growth, driven especially by global nominal economic growth, upward revisions to technology and energy earnings, and improved earnings expectations from AI infrastructure and energy prices. However, Goldman Sachs also emphasizes that the rally has become increasingly concentrated, while momentum, positioning, and sentiment have all overheated, making the market more vulnerable to shocks from growth disappointments, inflation pressure, or a rapid rise in bond yields.

Core views

First, earnings remain the main support for the equity rally, and global nominal GDP growth plus upward revisions in IT and energy earnings explain the market's recent resilience. Second, the momentum rally has become highly concentrated, with TMT, chips, energy, and some Asian markets contributing a large share of returns. Third, investor risk appetite and retail participation have risen sharply, leaving the market more vulnerable to negative shocks in the short term. Fourth, higher long-term bond yields compress the equity risk premium and weaken valuations for high-duration growth, quality, and defensive stocks. Fifth, market leadership is shifting away from the past decade's U.S., technology, and growth dominance toward a more diversified structure driven by capital expenditure, infrastructure, energy, industrials, chips, and parts of the value segment.

Analysis framework

The report uses a top-down global strategy framework that combines earnings revisions, regional returns, sector contributions, factor performance, bond yields, the equity risk premium, risk appetite indicators, and capital expenditure cycles to assess the sustainability of the equity momentum rally and its potential correction triggers. The analysis is focused not on a single company, but on structural changes in the market across regions, sectors, and styles.

Methodology notes

• Market sentiment and positioningRisk Appetite Indicator

  Risk appetite indicator

  Used to measure investor sentiment and risk-taking willingness. The report notes that the indicator has risen above 1.1, placing it in the 99th percentile since 1991, which shows that short-term optimism is very high.

• Valuation and ratesEquity Risk Premium

  Equity risk premium

  Used to measure the risk compensation of equities relative to bonds. The report argues that the combination of rising equity prices and higher bond yields has compressed the equity risk premium, making the market more susceptible to growth or inflation disappointments.

• Earnings momentumEPS revisions

  Earnings per share estimate revisions

  The report uses upward revisions to 2026 and 2027 earnings expectations to explain the fundamental support behind the equity rally, with particular emphasis on the contribution from IT, energy, AI capex, and energy prices.

• Style and sector rotationGeography, sector and factor framework

  Three-dimensional geography, sector, and factor framework

  The report argues that the past decade's pattern of U.S., technology, and growth leadership is changing, and that the new return sources are becoming more diversified across regions, sectors, and within growth/value styles.

• Capital structure and business modelHALO companies

  Asset-heavy but low-obsolescence-risk companies

  The report says that against the backdrop of rising capex and infrastructure demand, some asset-heavy but low-obsolescence-risk companies are regaining favor, while the terminal value of some asset-light companies is being eroded by competition and fears of technological substitution.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Global equities

  Earnings growth still supports the index, but valuation and positioning fragility are rising

  Strengths

  Upward revisions to global earnings, broadening returns across regions and sectors, and AI plus energy providing fundamental support.

  Weaknesses

  High concentration in the rally, a lower equity risk premium, and crowded momentum trades.

  Comparison

  Compared with the past decade's U.S., technology, and growth-led pattern, current return sources are more diversified.

  Risks

  A worsening growth-inflation mix, a rapid rise in bond yields, or a reversal in sentiment could trigger a correction.

• Bonds

  Rising yields are becoming a key constraint on equity valuations and market momentum

  Strengths

  Higher yields improve the relative attractiveness of bonds and also reflect shifts in term premium and government funding needs.

  Weaknesses

  A rapid rise in yields could hit risk assets and compress the valuations of high-duration stocks.

  Comparison

  Compared with the ultra-low-rate era, long-term yields in the 3.5% to 6% range have materially changed the asset-pricing environment.

  Risks

  Higher government borrowing, political factors, and competition from private capex for funding could keep pushing long-term yields higher.

• Technology and AI infrastructure

  Still a major driver of earnings revisions and market returns

  Strengths

  AI capex, chip demand, and infrastructure investment are driving earnings growth.

  Weaknesses

  Valuations for some U.S. mega caps have been downgraded amid concerns over free cash flow and future returns.

  Comparison

  Technology is becoming less homogeneous, with performance diverging more sharply between hardware, chips, and software.

  Risks

  High valuations, capex returns that fall short of expectations, and competition or technological substitution could weaken terminal value.

• Energy and Industrials

  Supported by energy prices, infrastructure, and the capex cycle

  Strengths

  Energy earnings revisions are significant, and industrials and old-economy sectors are benefiting from capex expansion.

  Weaknesses

  Sensitive to commodity prices, policy, and the investment cycle.

  Comparison

  Compared with the past, when they were often viewed as value traps, some capital-intensive sectors are regaining growth characteristics.

  Risks

  A pullback in commodity prices, a slowdown in the capex cycle, or higher financing costs.

• Defensive and quality stocks

  Facing valuation pressure from higher long-term rates

  Strengths

  Typically offer stable earnings and defensive characteristics.

  Weaknesses

  Viewed as bond proxy assets, with rate increases reducing their valuation appeal.

  Comparison

  More favored in the ultra-low-rate era, but the current rate environment is less supportive.

  Risks

  Further yield increases could put additional pressure on valuations.

Key data

• Estimated global nominal GDP growthAbout 5.9% in 2026, versus 4.7% last yearThe report says nominal global GDP growth is the main driver of corporate revenue.
• S&P 500 earnings estimate revisionsConsensus EPS for 2026 and 2027 has each been raised by 8 percentage points since the start of the yearExpectations for AI capex and higher energy prices contributed most of the positive revisions.
• S&P 500 year-to-date returnAbout 10%The report says TMT contributed about 85% of the return, highlighting the high degree of concentration in the rally.
• Korean equity market performanceUp nearly 80% year to dateDriven by the chip boom, and Asia strategists expect profit growth of about 300% for the index this year.
• Goldman Sachs risk appetite indicatorAbove 1.1, in the 99th percentile since 1991This is the highest reading since 2021 and reflects rising investor optimism.
• U.S. retail trading activityTrading volume has risen 28% since mid-April, and retail-preferred stock baskets are up 29%This reflects a clear increase in retail participation.
• Expected capex for the largest U.S. hyperscale cloud providersSpending expectations for the top five companies have been raised by about $80 billion to $755 billion, up 80% year over yearAI infrastructure capex is becoming an important driver of earnings for chips and related infrastructure.
• Long-term government bond yieldsAround 3.5% to 6% in multiple markets, with the U.S. above 5%The report says higher long-term rates weaken growth, defensives, and quality valuations.

Impact & implications

For investors, the short-term implication is that new index highs should not obscure the risk of a correction, especially given the need to monitor rapidly rising bond yields, inflation pressure, growth disappointments, and crowded positioning. The medium-term implication is that opportunities are broadening from a small group of U.S. mega-cap growth stocks to AI infrastructure, chips, energy, industrials, European banks, autos, and parts of the traditional value segment, increasing the importance of stock selection and cross-asset allocation.

Risks

• A rapid rise in bond yields could trigger a correction in the equity market.
• A deterioration in the growth-inflation mix could pressure high-valuation, high-positioning markets.
• High concentration in the momentum trade means pullbacks in a few sectors such as TMT, chips, and energy could amplify index volatility.
• Investor risk appetite is at an extremely high percentile, increasing the risk of a sentiment reversal.
• If AI capex and infrastructure investment fail to deliver expected returns, related earnings revisions could reverse.
• Government funding needs, political uncertainty, and competition from private-sector capex for capital could continue to push long-term rates higher.

What to watch

• The pace of increases in long-term government bond yields, especially U.S. 10-year and 30-year yields.
• Whether the equity risk premium continues to decline.
• Changes in Goldman Sachs' risk appetite indicator, retail trading volume, and retail-preferred stock baskets.
• Earnings revision trends for the S&P 500, MSCI AC World, MSCI EM, Korea, and Asian markets.
• Capex and earnings delivery in AI infrastructure, chips, energy, and industrials.
• Whether free cash flow, valuation multiples, and market leadership among major U.S. tech stocks continue to weaken.
• Whether new opportunity dispersion continues to emerge within growth and value styles.