US equities could remain resilient even if Treasury yields approach 5%, provided economic growth and corporate earnings remain strong, according to Invesco.

However, the asset manager warned that higher borrowing costs are beginning to expose vulnerabilities in lower-quality credit and weigh on broader stock market participation.

Yet Brian Levitt, head of strategy and insights at Invesco, believes the recent rise in US Treasury yields reflects underlying economic strength rather than mounting concerns over inflation or government finances.

While fiscal spending, rising oil prices and heavy bond issuance by technology companies have all been cited as potential drivers of higher yields, Levitt sees resilient economic activity as the more convincing explanation.

“Rates have increased, in my view, because nominal growth has remained resilient enough to support them,” he said.

This distinction matters for equity investors, as rising yields driven by stronger economic growth need not undermine stock market performance in the same way as an inflation-driven increase.

Credit markets under strain

Nevertheless, higher rates are creating challenges for more vulnerable borrowers.

Levitt highlighted widening spreads among Caa-rated corporate bonds, where highly leveraged companies face growing refinancing pressures as existing debt approaches maturity. Some of these businesses could also face disruption from artificial intelligence, adding another layer of uncertainty to their outlook.

Although the deterioration does not necessarily signal an approaching economic downturn, it suggests investors should pay closer attention to credit quality.

“I wouldn’t call that the proverbial ‘canary in the coal mine’ for the business cycle. Still, we ignore them at our own peril,” added Levitt.

By contrast, higher-quality corporate credit has shown greater resilience, with investment-grade and high yield spreads widening only modestly during September, excluding the weakest-rated borrowers.

Market leadership narrows

Higher Treasury yields are also reshaping equity market performance, with fewer sectors participating in the rally.

Utilities and consumer staples have become less attractive relative to higher-yielding bonds, while real estate remains particularly sensitive to borrowing costs.

Technology stocks, meanwhile, have regained favour as investors seek companies capable of delivering structural earnings growth despite a more challenging macroeconomic environment.

Levitt suggested that a sustained broadening of equity market leadership may require both Treasury yields and oil prices to decline, rather than simply stabilise. Such a scenario could emerge if higher financing and energy costs eventually moderate economic activity.

Earnings key to equity resilience

Despite these pressures, the S&P 500 remained close to its all-time high following September’s bond market sell-off.

Levitt also challenged concerns that US equities are being driven primarily by speculative enthusiasm, pointing out the market’s forward price-to-earnings ratio has declined this year even as share prices have advanced. That suggests corporate earnings growth, rather than expanding valuations, has helped sustain the rally.

Historically, higher Treasury yields have not necessarily translated into weaker equity valuations when accompanied by healthy nominal growth and rising profits. “Fortunately, there’s little historical basis to assume that a 5% Treasury yield will translate into sustained lower stock valuations,” Levitt said.

For fund selectors, the main implication is selectivity: distinguishing companies with sustainable earnings growth from those more exposed to refinancing pressures, while assessing whether narrow market leadership can broaden again.