Investors had every reason to hit the sell button. The 10-year Treasury yield climbed above 4.5%, crude oil punched through $100 a barrel, and the Federal Reserve kept hinting that rates would stay higher for longer. Historically, that combination has been kryptonite for equities. Yet the S&P 500 barely flinched, and some sectors even pushed higher. What gives? The answer can be summed up in two words: earnings power.
It sounds almost too simple. But in a market that has spent the past two years obsessing over every basis point of yield and every barrel of oil, the resilience of corporate profits has quietly become the story that matters most. When earnings are strong and growing, stocks can absorb a lot of macro pain. When they are not, even the friendliest rate environment won't save them.
The Old Playbook Says Sell. This Time, It Didn't Work.
For decades, the relationship seemed reliable. Rising yields make bonds more attractive relative to stocks, compressing equity valuations. Higher oil prices act like a tax on consumers and businesses, squeezing margins and slowing growth. Put the two together and you have a recipe for a correction. That's what happened in 2022, when the S&P 500 fell 19% as yields and oil both surged.
But 2024 and 2025 have written a different script. The 10-year yield has moved from around 3.8% to over 4.5%, and oil has traded in the triple digits for stretches. Instead of collapsing, the S&P 500 has ground higher, led by a handful of megacap technology names but with participation broadening out. The disconnect has left many strategists scratching their heads. The explanation, however, is hiding in plain sight.
Two Words That Change Everything: Earnings Power
Earnings power is not just about whether a company made money last quarter. It is about the ability to generate robust profits consistently, even when the economic backdrop shifts. That means pricing power, cost discipline, and a business model that doesn't crumble when input costs rise. Right now, Corporate America is displaying more of it than many expected.
Consider the energy sector. When oil goes to $100, energy companies don't just survive; they thrive. Their profits balloon, and those profits flow into the S&P 500. In fact, energy has been one of the biggest contributors to aggregate earnings growth over the past year. So while higher oil prices hurt airlines, retailers, and manufacturers, they boost the very companies that make up a meaningful chunk of the index. The net effect on overall earnings is not as negative as the old playbook assumes.
Then there is the technology sector. Many of the largest tech firms are asset-light, generate massive free cash flow, and have little direct exposure to oil. They are also sitting on piles of cash that earn higher interest income as yields rise. In a strange twist, higher rates can actually benefit these balance sheets. Their earnings power remains formidable, and that supports their stock prices even as discount rates climb.
Why Bond Yields Aren't the Villain They Used to Be
Rising yields are supposed to be bad for stocks because they raise the discount rate applied to future earnings. But that logic assumes earnings are static. If earnings are growing faster than the discount rate, the math still works in favor of stocks. And that is exactly what we have seen.
According to FactSet, S&P 500 earnings are on track to grow by double digits in 2025, following a solid 2024. That growth has been driven by a combination of resilient consumer spending, a tight labor market that supports wages, and a wave of productivity gains from artificial intelligence and automation. When earnings are compounding at that pace, a 4.5% yield on the 10-year Treasury doesn't look so intimidating.
The Role of Real Yields
It's also worth noting that not all yield increases are created equal. If yields rise because of stronger growth expectations, stocks can handle it. If they rise because of inflation fears or fiscal concerns, that's more problematic. Lately, the rise in yields has been driven more by real rates (adjusted for inflation) than by inflation expectations. Real rates rising can be a sign of economic strength, which is ultimately good for earnings. That nuance is often lost in the daily noise.
Oil at $100: A Tailwind for Some, a Headwind for Others
Oil at $100 is not uniformly bad for stocks. It is a transfer of wealth from consumers and oil-importing businesses to energy producers. In the S&P 500, energy companies represent about 4% of the index by weight, but they punch above their weight in earnings during oil spikes. Meanwhile, the consumer discretionary sector, which includes airlines and retailers, takes a hit. The index is not a pure play on lower oil prices; it is a diversified portfolio that includes both winners and losers.
What matters is the net effect on aggregate earnings. If energy earnings rise by $50 billion and consumer earnings fall by $30 billion, the net is still positive. That helps explain why the S&P 500 can climb even as oil surges. Of course, if oil stays at $100 for too long, the drag on consumers could eventually outweigh the benefit to energy. But for now, the earnings power of the index as a whole is holding up.
What This Means for Investors
The lesson here is not that macro factors don't matter. They do. But they matter less than the trajectory of corporate profits. In a world where yields and oil are volatile, the market will increasingly reward companies that can grow earnings regardless of the backdrop. That means focusing on businesses with strong competitive advantages, pricing power, and healthy balance sheets.
It also means being selective. The index-level resilience masks significant divergence beneath the surface. Energy stocks have soared, while airlines and retailers have struggled. Technology giants have powered ahead, while smaller, unprofitable companies have languished. The two words that explain the market's resilience also explain why stock picking has become more important than ever.
As long as earnings power remains intact, stocks can continue to defy the bears. But if that earnings power starts to crack, watch out. The same dynamic that is currently supporting the market could quickly reverse. For now, investors would be wise to keep a close eye on profit growth, not just headlines about yields and oil.
Frequently Asked Questions
Why do rising bond yields usually hurt stocks?
Rising yields increase the discount rate used to value future earnings, which lowers the present value of those earnings and can compress stock valuations. They also make bonds more attractive relative to stocks, drawing away some investment dollars.
How can oil at $100 be positive for the S&P 500?
The S&P 500 includes energy companies that benefit from higher oil prices. Their increased profits can offset the negative impact on consumer-facing sectors, leading to a net positive effect on aggregate earnings.
What does 'earnings power' mean in this context?
Earnings power refers to a company's ability to generate consistent and growing profits even when the economic environment changes. It is driven by factors like pricing power, cost efficiency, and a strong competitive position.
Should I adjust my portfolio based on this trend?
It depends on your goals and risk tolerance. The current environment favors companies with strong earnings power and low sensitivity to interest rates and oil prices. Diversification remains key, and consulting a financial advisor is always recommended.