European Equity Strategy Is the rates pressure for equities starting to fade

European Equity Strategy Is the rates pressure for equities starting to fade?

Rising real bond yields have been a headwind for equities: European equities have been on a tear, rising 14 August 2026 by 12% year-to-date and 35% over the past two years, driven by a rise in EPS expectations to all-time highs Equity Strategy and a compression in the equity risk premium to a 25-year low. Yet, this boost has been offset by a rise in the Europe US real bond yield, the discount rate for global equities, to just below a 20-year high, at 2.4%. We see scope for the pressure on equities from real yields to start fading: the rise in real bond yields was due to a hawkish turn in central-bank expectations driven by rising inflation and better US jobs numbers. However, the latest data point to a reversal in both trends. If that continues, it should help to assuage and potentially reverse the back-up in yields. On the labour-market front, US payrolls fell by 23k in July. In Sebastian Raedler >> combination with downward revisions to previous months, this lowered the three-month run rate from 111k in Investment Strategist June to just 20k. On inflation, our US economists are tracking core PCE inflation at 0.19% month-on-month in MLI (UK) July. If realised, the two-month annualised rate would fall to around 2%, the lowest reading since last April. Our rates strategists see downside for the US 10-year nominal bond yield to 4.50%, despite the Fed hikes Thomas Pearce, CFA >> projected by our economists. In combination with their long position in inflation swaps, this implies scope for Investment Strategist MLI (UK) lower real bond yields. Our global strategists also recommend a positive stance on duration to protect against the potential disappointment of the bullish consensus around macro resilience and a sustained AI capex boom. Andreas Bruckner >> We remain negative on European equities, given the scope for wider risk premia: if inflation concerns Investment Strategist MLI (UK) ease and real rates decline again, this would boost equity multiples, all else equal. Our base case is nonetheless for multiple compression, as we see upside for the equity risk premium from the current lows, given risks

around energy supplies from the US-Iran war, question marks around the AI capex outlook, fragility in the US labour market, and the potential for rising defaults. In our base case, we see more than 10% downside for the Stoxx 600 to 580 by early Q2 next year. A renewed decline in bond yields would lead to outperformance for PMI: Purchasing Managers’ Index defensives versus cyclicals, growth stocks versus value stocks and quality stocks versus the market. At the ISM: Institute for Supply Management sector level, it would boost staples, pharma and real estate, while weighing on banks. Our expectation of fading bond yields leads us to move our financial services positioning from marketweight to underweight following TWI: trade-weighted Index the recent rally. ERP: equity risk premium

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Is the rates pressure for equities starting to fade?

EPS upgrades and risk-premia compression have supported the equity rally, but rising real bond yields have been a persistent headwind: European equities have been on a tear, rising by 12%…