Elevated yields represent a normalization of interest rates and robust growth, argues one economist

Bond yields across the world are hitting major milestones daily. This may not necessarily be the negative investors tend to think it is.

Across the globe, bond yields are setting new highs, with 10-year benchmarks at their steepest in 30 years in Japan, 15 years for Germany and 18 years in the U.K. But not everyone is worried that the higher interest rates will hurt stocks.

Economist Matthew C. Klein published a piece Tuesday on Substack in which he contended that "rising bond yields are good actually" because they are illustrative of strong growth - with incomes and spending currently rising 7% annually and robust demand for capital, especially amid the build-out of AI infrastructure. He also said it was a normalization from the dysfunctionally low-rate era that followed the global financial crisis of 2008.

"The low rates that too many people had come to view as normal were symptoms of deep social pathologies," argued Klein.

Klein also pointed out that, despite the uptick in bond yields that many commentators attribute to unsustainable fiscal deficits, "so far [there is] zero evidence of any looming slowdown in U.S. economic data." In fact, Klein reckons, he said, that the increased probability markets now attach to a Fed hike in September after the hawkish commentary from Kevin Warsh last Friday, is "mostly good news." Klein added that "consumer spending and business investment have both become far less sensitive to credit conditions than in the past."

Publishing his outlook for the remainder of the year on Tuesday, JPMorgan strategist Mislav Matejka also said that "we do not expect rising bond yields to present an insurmountable obstacle for stocks." His rationale: that those higher rates "reflect stronger activity momentum."

This relatively phlegmatic approach to an issue that has been blamed for stalling equity markets of late explains why Matejka and his team have remained bullish into year-end. The drivers for further upside in stock markets globally are strong earnings delivery and upward earnings-per-share revisions, the possibility that central banks may deliver less tightening than investors fear and rebounding purchasing-manager indexes that show stronger activity momentum.

Asks JPMorgan strategist Mislav Matejka: Are central-bank rate hikes really needed when CPI is set to fall?

Matejka finds European PMI revisions in particular are up for three consecutive months, he said, and this augments his investment case for European VGK and international stocks VXUS, which should also be bolstered by dollar DXY peaking. (For U.S. investors, a weaker dollar increases the returns from buying in stock markets denominated in other currencies.)

Equities have typically liked a weaker dollar, especially in emerging markets and other overseas markets.

Matejka doesn't believe rate-increase expectations will get more hawkish than they already are, he said, and so, while the dollar has been acting as a safe haven (of sorts) since the Strait of Hormuz crisis began, it may start to depreciate again. That plays into the hands of gold (GC00), which has lost around 20%-25% since the outbreak of hostilities in the Middle East. Matejka expects gold to bounce, he said, and suspects the debasement trade - a preference for hard, inflation-proof, safe-haven assets as fiat currencies devalue - is back in play.

Helping the argument for international stocks, Matejka thinks U.S. valuations look "stretched" at 20 times forward earnings, he said, but international and emerging markets look cheaper. After outperforming the U.S. by 15 percentage points in 2025, the MSCI World All Cap Index is 4% better this year also and the report predicts this trend will continue. JPMorgan's year-end target for the S&P 500 index SPX is 8,000, around 3% higher from here.

Matejka is sticking to an overweight call on emerging markets EEM at the expense of developed markets and highlights a stabilization in the memory trade or a recovery in the Chinese economy as potential drivers.

-Jules Rimmer