Why Citi Thinks Rising Bond Yields May Not Derail European Stocks

European equities are facing a classic market tension: bond yields are rising sharply, which normally pressures stocks. Yet Citi’s head of European equity strategy, Beata Manthey, argues that the global bond market selloff is “not necessarily bad” for European stocks because the region’s corporate earnings outlook is still improving. When profits and earnings expectations rise, they can offset the valuation pressure caused by higher interest rates.

The key idea is simple: if companies are earning more money, stock markets can stay resilient even while borrowing costs increase.

Why rising bond yields don’t automatically hurt equities

Bond selloffs push yields higher, which typically weighs on equities because higher rates make future profits less valuable and raise financing costs. But that relationship isn’t always one‑to‑one.

Manthey’s argument centers on earnings momentum. According to Citi’s analysis, earnings-per-share (EPS) expectations for the European market are increasing rather than falling, providing a fundamental cushion for stock prices.

As long as earnings growth continues to improve, equities can absorb some of the pressure from rising yields. In other words, stronger corporate fundamentals can counterbalance macroeconomic headwinds.

A surge in European corporate profits

Recent earnings data supports that view. Forecasts show that European corporate profits are expected to grow at their fastest pace in three years, according to aggregate estimates compiled from company results and analyst projections.

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.