Why it’s not time to leave the equities party yet

The S&P 500 is sitting near all-time highs, record IPOs are hitting the market, and investors have enjoyed a stellar three years of double-digit returns. It’s fair to say that the party in global equity markets is in full swing.

​At the time of writing, the yield on the US 10-year bond has surged to 5.11% - the highest level since July 2007. We all know how that party ended, and those hazy memories are putting markets on edge. The simple conclusion many are drawing is that this higher yield environment is bad for equities.

Iona Dent, Associate Portfolio Manager at global asset management behemoth T. Rowe Price, likens today’s environment to 1998 or 1999 - the period leading into the dot-com crash. ​But don’t mistake the view for bearish positioning; quite the contrary. 

The late stages of a bull market can deliver stellar returns, and Dent believes there are plenty of reasons to stay invested - top of the list is the almost unprecedented levels of earnings growth coming from companies. Her one caveat: know your exits.

​“We're making sure we know where the exits are so that when the time comes to take chips off the table, we have a list of defensive names that we are all over and we can pivot into.”

​In this episode of The Rules of Investing, Dent explains why she believes the earnings story in global shares outweighs concerns around rising bond yields and walks through the five dimensions of T. Rowe Price’s ‘bubble watch’ framework.

You can watch or listen via the players below.

​Interest rates - the topic du jour

Rate discussions have taken centre stage for good reason - things are moving quickly, and it wasn’t that long ago that markets were expecting the US to be lowering (not hiking) rates. That reversal has equity investors on edge, and equity markets have been volatile, although arguably much less than the bond market.

​While 10-year Treasury yields pushing past 5% may spook markets accustomed to post-COVID lows, Dent points out that sustained 5%+ yields were the norm throughout the 1970s, '80s, and '90s. Crucially, the transmission mechanism between bond yields and the real economy is far less direct than in past cycles. Both US households and corporates locked in ultra-low, 30-year fixed funding post-2020, leaving balance sheets resilient.

Rather than fearing higher discount rates, Dent is keeping her attention fixed on corporate health and upward earnings upgrades.

​“Earnings are going to keep rising faster than the de-rating we could see as a result of slightly higher discount rates.”

Dent argues that recently revised GDP growth expectations suggest the Federal Reserve can prioritise reining in inflation because economic growth remains exceptionally strong.

Signs of later-stage bull market froth

While overall market valuations remain far more grounded than during the tech bubble of 2000, Dent acknowledges that pockets of speculation are simmering away. Narrow leadership has taken hold, with a cluster of large companies driving overall index returns while retail participation surges around popular secular themes like AI hardware and hyperscalers.

​In certain corners of the market, behaviour strongly echoes dot-com era antics. Companies like Palantir have traded above 100 times revenues - a metric that historically leads to poor multi-year returns.

​“We've done a study on companies that trade on 100 times revenues historically, and honestly, it's never a good outcome.”

​However, Dent emphasises that the broader picture remains far more rational. Global tech trades at a modest mid-teens earnings multiple, while market leaders like Nvidia trade at roughly 14 times forward earnings, a sharp contrast to Cisco trading over 100 times earnings at the 2000 peak.

​“So for now, we think it's more 1999 than we're in 2000. But a lot of the analogies hold, and we've got to watch very closely and keep this systematic and not emotional.”

Breaking down bubble fears

Rising rates, market froth and a game-changing technology are all the ingredients needed for bubble talk to go into overdrive. To take the emotion out of decision-making, T. Rowe Price has developed a framework for assessing just how exuberant markets are.

Based on current conditions across the '5 dimensions' conditions remain balanced, underpinning T. Rowe's constructive view on equity markets.

• ​Rates: Fed policy signals remain hawkish and real rates have moved higher, but current increases are measured enough for broader earnings to absorb without triggering systemic market stress.
• ​Economy & Employment: Economic activity continues to be resilient with accelerating GDP growth and falling unemployment expectations, keeping corporate earnings on an upward trajectory.
• ​AI Supercycle: Compute capex spending by hyperscalers continues to accelerate, with frontier models generating genuine technological breakthroughs and real revenue growth.
• ​Leverage: Corporate and consumer balance sheets are healthily funded by free cash flows rather than excess debt. Pockets of leverage risk remain largely isolated to sovereigns and private credit markets.
• ​Geopolitics: Sitting closest to the red risk zone on their indicator model, diplomatic tensions and political election cycles represent the primary potential sources for exogenous market shocks.

So what are investors getting wrong?

The level of scepticism towards the AI trade is persistent - it really is a battle of the bulls and the bears. Dent sits in the bulls' camp, arguing that we're still only just figuring out how big the market for AI and therefore compute will be.

​“Agentic AI is huge. People somewhat understand it, but it remains a bit conceptual until you really see it in action. A lot of the focus has been on enterprise AI use cases, coding, and software companies, whereas the personal side is still quite nascent. For me, it comes back to the CPU intensity of AI, and I think that is still the next leg of the trade.”

However, when I ask Dent to nominate a stock to own for the next five years she opted for one that sits outside the AI driven trade. 

"If you're asking me to own something for five years without being able to trade it, I want a business where I have unusually high confidence in the duration of the earnings growth rather than needing to predict the next macro turn or the next kind of technological innovation in AI."

Her pick is Welltower (NYSE: WELL), the largest owner of seniors housing in the US. Dent says the stock, while not cheap, is ideally positioned to benefit from an ageing population.

Dent says Welltower is already growing earnings at more than 20% with a good balance sheet and modest gearing. In addition, a key angle underpinning her thesis is the quality of the management team who are utilising technology to drive efficiency.

"They are all over using data and technology to improve things like response rates, room turns, occupancy, procurement. So it's historically being a very fragmented industry and it's still early, but I think that can potentially extend the margin opportunity for them as well."