Few relationships have been as important to financial markets as the one between stock prices and interest rates. This week, our featured indicator tracks that relationship by comparing the S&P 500 Index (top panel) to the 10-year Treasury yield and how far that yield sits from its long-term trend (bottom two panels).
The idea is simple: yields fluctuate around a longer-term trend. When rates deviate sharply from their historical regression line—either above or below—it often signals a turning point in financial conditions. The very bottom clip shows that deviation in blue, with the dashed lines marking the upper and lower standard deviation bands. When yields are well below trend, it tends to reflect easing financial pressure—and historically, that’s been a good thing for equities.
We’ve seen this play out many times before. In 2019, yields dropped sharply as global growth softened, and stocks rallied. The same pattern reappeared after the 2020 pandemic shock, when falling yields helped fuel one of the fastest recoveries on record. And now, things are looking similar again.
Over the past several months, the 10-year Treasury yield has rolled over from its cycle highs, moving back toward the lower end of its trend range. That easing has helped stocks climb to fresh highs, while at the same time the economic backdrop has remained positive. Basically, stocks have been able to enjoy the benefits of lower yields without the usual fears of a slowdown because earnings and growth trends continue to suggest that recession risks are low.
According to the long-term data, when yields sit at or below the lower bracket—as shown in the table at the bottom—the S&P 500’s average annualized gain has been roughly 15% to 18%, far stronger than periods when yields are elevated or above trend. In other words, markets tend to do best when rates are falling but the economy isn’t—and that’s exactly what we’ve been experiencing.
The bottom line? Interest rates matter. A declining 10-year rate can be a powerful tailwind for stocks, particularly when we see stocks at such high valuations. As long as growth and earnings continue to hold steady, the yield backdrop should remain supportive of stocks. But if yields reverse course, that would raise some alarming questions for financial markets.
This is intended for informational purposes only and should not be used as the primary basis for an investment decision. Consult an advisor for your personal situation.
Indices mentioned are unmanaged, do not incur fees, and cannot be invested into directly.
Past performance does not guarantee future results.
The S&P 500 Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S.