Why Citi Thinks Rising Bond Yields May Not Derail European Stocks

Much of that growth is concentrated in a few powerful sectors:

• Energy: Higher oil prices linked to geopolitical tensions have boosted profits for European oil and gas companies.
• Financials: Banks tend to benefit from higher interest rates, which can widen lending margins.

Together, these sectors have been responsible for much of the earnings acceleration across the region’s major stock indices.

The strong earnings backdrop helps explain why equities can remain resilient even while bond markets are under pressure.

Citi’s expectation of further equity gains

Citi’s broader equity outlook also remains constructive. The bank has indicated that global equities could still see around 5% additional upside if earnings expectations continue to hold up.

That projection reflects a view that markets are being supported more by profit growth than by expanding valuations. If corporate earnings keep rising, stock prices may still advance even as interest rates stay elevated.

Why the bond selloff is happening

The bond market turmoil has been driven by a mix of geopolitical and macroeconomic factors.

In particular, investors have been selling government bonds amid inflation fears linked to the Middle East conflict and rising energy prices, which push up inflation expectations and raise the prospect of tighter monetary policy.

As bond prices fall, yields rise—raising borrowing costs across global financial markets and increasing the challenge for equity valuations.

The key risk: narrow market leadership

Even with strong earnings, the outlook is not risk‑free.

The current profit growth supporting European equities is heavily concentrated in energy and financials, rather than spread evenly across the market. Analysts note that without the energy sector, earnings growth among European companies would be far weaker in many forecasts.

This concentration creates a potential vulnerability. If the sectors driving profits slow down—or if energy prices fall—the broader market could lose a key pillar of support.

The bigger picture: yields vs. earnings

The current market environment highlights a broader dynamic in global investing. Rising bond yields typically challenge equity valuations, but strong earnings can counteract that pressure.

For now, European stocks are benefiting from improving profit expectations. But the durability of that resilience will depend on whether earnings growth continues—and whether it broadens beyond a narrow group of sectors.

If profits keep climbing, equities may remain stable despite higher yields. If not, the bond selloff could eventually start to weigh more heavily on stock markets.