Here's what is keeping stocks from completely crashing with the 10-year above 3%

Yields on 10-year Treasury notes broke through 3% on Tuesday for the first time since 2014. The rise in the 10-year yield has the potential to dampen spending as consumers and companies spend more to service their debt. Stock prices dropped Tuesday as this closely watched 3% threshold was breached.

According to Fidelity Investment director of global macro Jurrien Timmer, the market’s reaction could have been a lot worse if earnings growth wasn’t booming.

Jurrien Timmer sat down with Business Insider’s Sara Silverstein two weeks ago to talk about his outlook for equities. Timmer sees a lot of pressures on valuations ahead including tightening financial conditions. He has said that there is a sweet spot where valuations can compress and stock prices still rise if earnings growth is strong enough. During that interview here’s what he said he would be watching for this earnings season.

“It’s interesting because generally the earnings estimates, if you look at the aggregated consensus numbers, they tend to start high and drift lower. I mean, that’s sort of been a hallmark of earnings season. But this time around, this will be the first quarter since the corporate tax cut and the estimate is for a 17% year-over-year growth, and that estimate has been rock-solid now for probably at least four or five weeks. So it’s really interesting how it has not drifted down, and the same thing is true for Q2, which is pegged at 19% right now. So what I’m looking at for earnings season, which is of course starting now, is A: to see whether the companies will deliver that 17%, and my guess is that they are, because generally if they’re not going to, they will guide lower – you know, nobody likes surprises. But more importantly, will they guide towards the next quarter lower, the same, or higher? And again, the tax cuts were a really monumental event, a onetime event that a lot of companies weren’t even really expecting, and this will be the first quarter, post that tax cut. So it will be an important barometer to see where companies think they’re going, not so much in Q1 but moving forward. And if earnings growth stays up, you know, in the 17, 19, 20%, you can have what I would call a benign valuation reset. But if the numbers turn out to be either too high or they’re where they need to be but they will come down, then that maybe is a different story, cause then you lose that tailwind.”

And now, well into the earnings season we are seeing companies deliver on those high year-over-year earnings growth estimates. In this chart posted by Timmer you can see the EPS growth estimates for the past four quarters drifted lower in the weeks before the companies start reporting. The estimates for the first and second quarter this year have drifted higher and then have been solidly in the very high teens.

Read More: Stocks: Nowhere to go but sideways

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