Rising bond yields threaten the stock rally in Europe. What are some investment options?

Rising global bond yields are causing investors to question whether the rally in the European stock market will continue, according to Bloomberg. Fiscal and inflationary risks are weighing on the economy, which until now had appeared fairly resilient. Unlike in the previous five years, European stocks are now roughly three times more sensitive to movements in bond yields.

The European Stoxx 600 index rose 8.5% in 2026, lagging behind the broad-market S&P 500 index, which gained 12.6%. This runs counter to the historical trend: Europe has more stable and reliable “value stocks” than the more dynamic and risky “growth stocks” that dominate in the U.S. and Asia and typically underperform during periods of rising interest rates, according to Bloomberg.

However, according to the agency, over the past year, the Stoxx Europe 600’s sensitivity to the 10-year euro swap rate has nearly tripled compared with the average over the previous five years. Bloomberg believes that the key question for investors is what is driving this trend in government bonds.

“The key question is whether yields are rising because economic growth remains strong, or because investors are demanding compensation for inflationary and fiscal risks, ” said Simon Wiersma, chief investment strategist at ING. “In the first case, stocks may still perform relatively well. In the second case, rising yields are more likely to lead to a contraction in valuations.”

Bloomberg believes that both scenarios are currently playing out to some extent. According to the latest data, business activity remains high, and analysts continue to raise their corporate earnings forecasts. On the other hand, the war in Iran has driven up oil prices, fueled concerns about inflation prospects, and made central banks more “hawkish,” the agency reports.

Rising government spending and high political uncertainty are additional causes for concern, according to Bloomberg. The yield on 10-year German government bonds, for example, has risen to its highest level since the global financial crisis amid setbacks for Chancellor Friedrich Merz’s party. And in France, presidential elections are scheduled for 2027.

The situation at the macro level is exacerbated by rising corporate debt burdens, Bloomberg adds. According to the Boston Consulting Group, one in six companies in Western Europe (16.2%) is experiencing financial difficulties. The “net debt-to-EBITDA” ratio rose by 22% between 2022 and 2025, with nearly one-third of companies starting 2026 with a ratio above 3—a level BCG considers the threshold for financial stress. Many borrowers are trying to reduce their debt burden after taking on cheap debt during the COVID-19 pandemic. This reduces their ability to cope with persistently high interest rates and disruptions in trade.

“If business plans don’t come to fruition or another shock occurs, companies will have fewer options than they did a few years ago,” said Tobias Vens, managing director at BCG and co-author of the report, noting that businesses have emerged from five challenging years with a large amount of debt.

Against this backdrop, UBS Group AG strategist Jerry Fowler advises investors to focus on European cyclical sectors as the economy recovers. “Stick with companies that have the lowest beta relative to earnings growth, as their valuations are lower and their earnings exhibit greater cyclicality and growth—enough to offset the pressure on valuations,” Fowler noted. According to him, semiconductor manufacturers, the industrial sector, and transportation companies currently meet the “growth at a reasonable price” criterion.

The banks’ financial metrics also look attractive, as high interest rates directly boost their net interest income, Bloomberg adds. Investors are convinced that the rally in bank stocks is far from over, thanks to their earnings potential. “If German bond yields continue to rise, Europe will continue to benefit through the banking sector,” said Wolf von Rothberg, equity strategist at Bank J Safra Sarasin.

At the same time, the risk of rising energy costs is a serious cause for concern, Bloomberg notes. Although rising oil prices this year have bolstered the performance of commodity companies, a prolonged price increase will affect winter gas bills and hit consumer spending. This will put additional pressure on the luxury goods, retail, and automotive sectors, Bloomberg notes. Data from BCG also confirms the vulnerability of certain sectors: about 28% of automakers are already facing pressures that require restructuring amid weak demand, the costs of transitioning to electric vehicles, and competition from China.

In addition, according to BCG estimates, real estate companies have found themselves in a high-stress zone (about 62% of them need to transform due to high interest rates and declining housing affordability), as well as about one-fifth of media and publishing companies, which are losing their audience to online platforms and AI.

“Europe is more vulnerable to high energy prices and has limited earnings growth momentum compared to the U.S. and some emerging markets,” noted Simon Wiersma. “We recently downgraded Europe’s rating precisely for these reasons.”

Market sentiment has so far supported optimistic earnings forecasts. However, the pace of upward revisions is slowing, and any further deterioration would cast doubt on the Stoxx Europe 600’s year-end rally, Bloomberg concludes.

“Earnings are showing stability, and this makes stocks much more resilient to movements in bond yields,” said Sophie Huyn, a portfolio manager at BNP Paribas Asset Management. “But if earnings trends begin to shift and forecasts are revised downward, that’s when the situation will start to deteriorate.”

On Monday, September 28, European stocks rose, in contrast to U.S. stocks: investors shrugged off rising bond yields and the renewed spike in oil prices, according to Bloomberg. The Stoxx Europe 600 index gained 0.6%, the German DAX and the British FTSE 100 rose 0.5%, and the French CAC 40 rose 0.65%.

Shares of British homebuilders—Taylor Wimpey, Bellway, Persimmon, and Barratt Redrow—led the rally, surging more than 10% after the government announced a new loan program for first-time homebuyers. Analysts at JPMorgan called the plan a potential “turning point” for the sector.

Retail chains and consumer goods manufacturers posted gains, while France’s Rexel SA rose 2% following the announcement of its acquisition of a supplier of specialty cables and wires. At the same time, mining company stocks fell due to a decline in precious metal prices.

This article was AI-translated and verified by a human editor