When a bond yield rises, the rate investors use to value future company cash flows may rise too, reducing the present value of those cash flows. That can weigh more heavily on growth stocks when more of their valuation depends on profits expected far in the future. But yields are only one influence: expected earnings, the reason yields moved, and the compensation investors demand for equity risk can all change at the same time.
How do bond yields affect stock prices?
A simplified way to think about a stock’s value is the present value of its expected future cash flows. Investors discount those expected cash flows using a rate that reflects both a relatively low-risk interest rate and compensation for taking equity risk. If the relevant discount rate rises while expected cash flows and the risk premium stay unchanged, the present value falls.
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This is the basic reason bond yields and stock valuations can move in opposite directions. The Federal Reserve explains that asset prices can also change because expected future payoffs change, interest rates change, risk premiums change, or several of those factors shift together. As it put it in its May 2021 Financial Stability Report: “An increase in asset prices might reflect higher expected future payoffs; a decline in the overall level of interest rates, which raises the current value of those future payoffs; a fall in risk premiums; or a combination of these factors.” Federal Reserve Board, May 2021 Financial Stability Report.
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Why do rising interest rates hurt growth stocks?
Growth companies are often considered more rate-sensitive because investors may assign a larger share of their value to cash flows expected farther in the future. Discounting has a greater effect on a distant cash flow than on an otherwise identical near-term cash flow: as the discount rate rises, the distant amount loses more present value.
A simple discounting example
Suppose two companies are each expected to produce the same cash flow, but one is expected to produce it soon and the other much later. A higher discount rate reduces the present value of both, but reduces the value of the later payment more. This illustrates the valuation mechanism; it is not a forecast of how either company’s share price will move.
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“Growth stock” is not a guarantee of a particular cash-flow pattern, and sensitivity varies among companies. Actual results also depend on earnings revisions, business prospects, leverage, and risk appetite. A rise in yields can coincide with stronger expected growth or other favorable changes that support stock prices.
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A nominal Treasury yield is not simply a forecast of future central-bank policy. It reflects the expected average of short-term rates over the bond’s life, along with a term premium. The term premium compensates investors for holding a longer-maturity bond and is estimated using models rather than observed directly. Inflation compensation also matters when interpreting nominal yields. The Federal Reserve cautions against treating longer-horizon forward rates as a one-for-one measure of expected future short rates. See its Treasury term-premium discussion.
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That is why maturity and the source of a yield move matter. A 2-year Treasury yield and a 10-year Treasury yield reflect different horizons; a move driven by expected policy rates need not have the same implications as one driven by inflation compensation or a change in the term premium. Real yields, which account for inflation expectations, can also tell a different story from nominal yields.
Can stocks rise when bond yields rise?
Yes. Stocks can rise while yields rise if investors expect stronger future cash flows, if equity risk premiums fall, or if those forces outweigh the discount-rate effect. Conversely, stocks can fall while yields decline if expected earnings deteriorate or investors demand more compensation for risk. The yield-stock relationship is a mechanism to analyze, not a one-variable rule for predicting market direction.
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Recent Federal Reserve research highlights why it is important to distinguish the cause of a move. Its June 2026 working paper, “The Response of Equity Yields to a Long-Run Shock,” found that a positive long-run growth shock increased expected dividend growth while leaving discount rates largely unchanged. Growth-firm equity yields responded more strongly than value-firm yields because expected dividend growth changed more. That result concerns an identified growth shock, not every increase in Treasury yields, and should not be read as a universal estimate of growth-stock sensitivity. Federal Reserve working paper.
How to interpret a yield move alongside stocks
Before drawing a conclusion from a chart or headline, identify what is moving and what may be changing on the equity side:
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- Specify the yield: Is it nominal or real, and is it a short- or long-maturity Treasury yield?
- Ask why it moved: Is the change associated with expected policy rates, inflation compensation, or the term premium?
- Consider cash-flow expectations: Are forecasts for company earnings or dividends improving or weakening?
- Consider equity risk: Has investors’ required compensation for holding stocks changed? The equity risk premium is not directly observable, and common proxies rely on assumptions; the Federal Reserve discusses one such approach in its Financial Stability Report methodology.
- Compare company horizons: Would a larger share of the company’s valuation be affected by discounting distant expected cash flows?
These checks help separate a plausible valuation channel from a claim that yields alone explain what stocks did.
What the Federal Reserve reported about valuations in November 2025
The November 2025 Federal Reserve Financial Stability Report said Treasury yields at the 2- and 10-year maturities had declined since its April report but remained above their average levels over the prior 15 years, while the longer end of the yield curve had steepened. It also said the S&P 500 forward price-to-earnings ratio remained well above its historical median. These are observations from the report period, not current market readings.
The report described its estimated equity premium as near a 20-year low as of October 2025. Its measure was forward earnings-to-price minus expected real Treasury yields. That is an estimate, not a directly observable premium, and it depends on the report’s methodology. Federal Reserve, November 2025 Financial Stability Report.
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