How do bond yields affect stock prices?

Bond yields influence stock prices primarily through valuation, competition for investor funds, and the real economy. When yields rise, the present value of expected corporate earnings falls because future cash flows are discounted at higher rates. When yields fall, the opposite occurs. These mechanisms interact with monetary policy, inflation expectations, and global capital flows to drive market-level and sector-specific responses.

Valuation channel: discounting future earnings
Aswath Damodaran of New York University Stern School of Business lays out how discount rates enter standard equity valuation models: higher nominal yields typically raise equity discount rates, reducing fair values for firms with earnings concentrated in the future. John H. Cochrane of the University of Chicago Booth School of Business emphasizes that risk-free rates are a backbone of asset-pricing models; shifts in those rates recalibrate expected returns across risk assets. Growth-oriented companies, whose valuations rely heavily on distant cash flows, are particularly sensitive to yield moves, while value-oriented firms with near-term profits show less sensitivity.

Market and macro channels: policy, expectations, and flows
Campbell R. Harvey of Duke University documents how the term structure of interest rates and expectations about monetary policy affect investor behavior. A rise in short-term yields driven by central bank tightening raises borrowing costs for businesses and households, cooling demand and corporate profits over time. Longer-term yields reflect inflation expectations and real growth prospects; an increase in long yields can signal higher expected returns but also higher discounting, leaving net equity valuations ambiguous. Gita Gopinath at the International Monetary Fund has highlighted how U.S. yield shifts transmit internationally, prompting capital outflows from emerging markets when U.S. yields rise, which depresses local equities and raises sovereign funding costs.

Sectoral, cultural, and territorial consequences
Rising yields often trigger a sector rotation away from interest-rate-sensitive industries and toward financials, which can benefit from wider lending spreads. Real-estate and utility sectors, reliant on leverage and steady distributions, typically underperform when yields climb. Beyond finance, higher yields raise the cost of financing large infrastructure and clean-energy projects, with territorial consequences for regions dependent on public investment or foreign capital. Communities in low-income countries can experience sharper economic tightening because local markets are more vulnerable to capital flight and exchange-rate pressures, amplifying social and cultural strains tied to employment and public services.

Practical implications for investors and policymakers
Investors should monitor yield drivers—central bank policy signals, inflation data, and global risk sentiment—because those determine whether higher yields reflect stronger growth or tighter financial conditions. Policymakers face trade-offs: raising rates to control inflation can stabilize purchasing power but also compress equity valuations and slow investment. Recognizing the channels described by Damodaran, Cochrane, Harvey, and Gopinath helps interpret market moves and assess consequences for households, firms, and territories that differ in access to capital and resilience to global financial shifts.