Over the past three weeks, the yield on the 10-year German bund has more than tripled, albeit from incredibly low levels. And that's sending up warning signs for investors, particularly in U.S. equities.
"Low interest rates have supported global equity prices during a period of very slow macro growth," Convergex chief strategist Nicholas Colas wrote in a note Wednesday to clients. "To hold stock prices constant—or see them rise—during a period of rising rates, you need to see tangible signs of economic growth and rising corporate earnings."
The basic issue is that low bond yields support rich stock valuations, as they reduce the attractiveness of alternatives to risk assets. But U.S. yields have risen alongside European ones lately, in a move than investors have long been anticipating. If rates continues to surge, stocks will need to show some serious earnings growth.