Earnings carry the market – but rates warrant watching

Key takeaways

• AI-driven companies continue to power US earnings growth, helping to support equity markets despite a challenging macroeconomic backdrop.

• Unlike previous periods of strong profit growth, valuations have remained relatively restrained, suggesting investors are demanding greater confidence in future earnings.

• With both earnings yields and Treasury yields moving higher, the relationship between corporate profits and interest rates may be the key market dynamic to watch.

Despite exceptional earnings growth, US equity valuations have become less demanding this year. The disconnect reflects growing investor focus on whether today's AI investment boom can generate enduring future profits.

The AI earnings engine

The main driver of the US equity market remains earnings, increasingly shaped by the pace of AI capital investment and its prospects for monetisation. The result is a market that appears calm on the surface but carries unease beneath it, reflecting uncertainty about the durability of those earnings and their concentration in a single theme: the AI complex, which represents roughly 40% of US equity market capitalisation from hyperscalers through the broader AI supply chain.

The tension shows up in two ways. First, the market’s earnings yield has gone up this year (and its valuation – the inverse of earnings yield – has gone down), even as earnings growth has accelerated to historic highs. This contrasts with prior years when prodigious earnings growth was rewarded by multiple expansion.

Earnings yield and 10-year Treasury yield moving in tandem

Note: This chart compares the S&P 500 Index earnings yield and 10-year US Treasury yield from the first quarter of 2023 to the third quarter of 2026, along with the S&P 500 Index year-over-year earnings growth from the first quarter of 2023 to the second quarter of 2026.

Sources: Vanguard calculations, based on data from Bloomberg, as at 15 September 2026.

Second, a great deal of repricing has been taking place under the placid index-level volatility, where return dispersion across individual stocks has climbed to levels normally associated with drawdown periods.

A benign effect of rising yields?

Against the backdrop of rising US Treasury yields, the key question looking forward is what additional impact this might have on US equities. If the rising yield is driven by an anticipated pickup in real economic growth, the yield increase could be benign – or even supportive – for equity valuations. But another important factor may be contributing to the rise in yields. It’s likely that part of the increase reflects fiscal-sustainability concerns and uncertainty around a new approach from the Federal Reserve.

More time will be needed to understand whether the joint increases in earnings yield and Treasury yield over last few months are connected or entirely coincidental. But one thing is clear: if rates settle structurally higher, it would become another factor that eventually weighs on US equities. For instance, rising funding costs could impact the pace and/or cost of AI capital expenditure investment and create headwinds for more debt-dependent small- and mid-cap companies.

For the next few quarters, what earnings and IPO filing documents tell the market about the emerging economics of AI and AI capex sustainability will likely remain the dominant driver of US equities – but these rate channels, and whether they stay dormant or begin to bite, are worth monitoring closely.

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