European Stocks Caught in Tug-of-War as Rising Bond Yields Outweigh Improving Earnings

European stocks are in a tug-of-war, and rates are winning, according to the author.
Fundamentals are improving. Analysts are raising European earnings estimates at the longest upgrade streak since 2022, and forward EPS keeps climbing. But the market is not following, as rising bond yields are working against stocks:
- The correlation between the Stoxx 600 and EU 10-year rates has flipped sharply negative, to around -0.7.
- Europe's equity risk premium is widening versus the U.S., meaning investors demand a bigger cushion to own the region even as earnings brighten.
The author said this is what a bond-driven market looks like, since good earnings do not count for much when the discount rate climbs faster. Until yields stop rising, the author said to watch the 10-year rather than the EPS line. $VGK