Bond Yield Decline Drives Growth Stock Outperformance in 2026 Markets

This analysis is based on the MarketWatch report [1] published on November 6, 2025, which examines how declining bond yields are reshaping equity market dynamics across global markets.

The current market landscape is experiencing a significant rotation driven primarily by bond yield movements rather than traditional earnings growth metrics. According to Panmure Liberum strategist Joachim Klement, bond yields have become the key performance determinant for stocks in 2026, with declining yields creating a favorable environment for growth stocks across U.S., European, and U.K. markets [1].

Recent market data confirms this trend, with the 10-year U.S. Treasury yield declining to 4.10% on November 4, 2025, down from 4.13% the previous day [2]. This downward movement has triggered measurable performance differentials between growth and value styles. In October 2025, as U.S. ten-year bond yields slipped below 4%, value stocks underperformed by 1.9% regardless of valuation metrics used, while companies with strong earnings momentum outperformed by 1.4% [1].

Current market performance data supports the strategist’s thesis:

• Growth indices dominance
  : The NASDAQ Composite gained 5.29% over the past 30 trading days, significantly outperforming the Dow Jones Industrial Average’s 2.63% gain [0]
• Sector performance
  : Technology sector, heavily weighted toward growth stocks, posted a 0.40% gain in the latest session, while value-oriented sectors like Consumer Defensive (-0.45%) and Real Estate (-0.11%) showed weakness [0]
• ETF performance
  : Growth-focused QQQ gained 0.65% to $623.28, while value-focused VTV rose 0.48% to $185.21 [0]

The strategist provides valuable historical perspective, noting that U.S. value stocks experienced a “lost decade” from 2012 during the near-zero interest rate era following the global financial crisis [1]. After the 2022 inflation shock and subsequent interest rate spike, value stocks managed to outperform significantly until the recent yield decline reversed this trend.

Regional market dynamics show consistent patterns:

• Europe
  : Value stocks underperformed growth by 80 basis points in October as rates eased following summer volatility [1]
• U.K.
  : IPO market shows signs of rejuvenation with three IPOs in 2025 raising £850 million, compared to £600 million in all of 2024 [1]
• U.S.
  : Momentum stocks outperformed by 1.2% in October [1]

Contrary to expectations with the S&P 500 at record levels, Panmure Liberum’s proprietary sentiment indicator shows retail sentiment has returned to neutral territory. Klement observes that “the U.S. looks slightly undervalued compared to fundamentals” [1], suggesting the current rally is driven by fundamental factors rather than irrational exuberance.

The analysis reveals a critical insight about market mechanics: when bond yields decline, the discount rate applied to future earnings decreases, making high-growth companies with distant cash flows more valuable relative to value companies with current earnings. This mathematical relationship explains why bond yields have become the primary performance driver rather than earnings growth itself.

The consistent performance patterns across U.S., European, and U.K. markets indicate this is not a localized phenomenon but a global shift in investment preferences driven by synchronized monetary policy environments and yield movements.

1. Yield Reversal Risk
   : If bond yields begin rising again due to inflation concerns or Federal Reserve policy shifts, value stocks could quickly regain favor [1]. Historical data suggests yields above 4.25-4.5% could trigger a rotation back to value stocks.

2. Valuation Vulnerability
   : Growth stocks typically trade at higher multiples, making them more susceptible to multiple compression if yields rise. The current premium could rapidly erode in a rising yield environment.

3. Earnings Quality Concerns
   : The strategist notes that bond yields, not earnings growth, are driving performance, which could indicate underlying earnings weakness in growth companies.

1. Tactical Growth Exposure
   : The current yield environment presents an opportunity for tactical allocation to growth stocks, particularly in technology and momentum sectors showing strong relative performance.

2. International Growth Opportunities
   : The global nature of this trend suggests growth opportunities exist across multiple markets, with European and U.K. markets showing similar patterns to the U.S.

3. IPO Market Rejuvenation
   : The U.K. IPO market’s revival indicates improved market sentiment for growth-oriented companies entering public markets.

Investors should track:

• 10-Year Treasury Yield Levels
  : Critical threshold at 4.25-4.5% for potential style rotation
• Federal Reserve Policy Signals
  : Any indication of fewer rate cuts than currently priced in
• Inflation Data Persistence
  : Could force yields higher and benefit value stocks
• Earnings Momentum Quality
  : Sustainable earnings growth would support the thesis even if yields stabilize

The analysis indicates that declining bond yields have created a market environment favoring growth stocks over value stocks across global markets. The U.S. 10-year Treasury yield slipping below 4% has triggered measurable outperformance in growth-oriented investments, with momentum stocks gaining 1.2% and value stocks underperforming by 1.9% in October 2025 [1].

Current market data validates this trend, with growth indices like the NASDAQ Composite (+5.29% over 30 days) significantly outperforming value-oriented benchmarks [0]. The technology sector’s positive performance (+0.40% in latest session) further supports the growth preference [0].

Despite the S&P 500 reaching record levels, sentiment indicators suggest the market is not in bubble territory, with the U.S. appearing “slightly undervalued compared to fundamentals” [1]. This indicates the growth stock rally may have room to continue, assuming the yield environment remains favorable.

The global synchronization of this trend across U.S., European, and U.K. markets reinforces the thesis that bond yields have become the primary determinant of equity performance, superseding traditional earnings growth metrics in the current market cycle [1].