9-15-26: Stocks Adjust to a “New Normal” for 10-Year Treasury Rates

by Bryan Perry

September 15, 2026

A shift in the 10-year U.S. Treasury yield from the 4.0%-4.5% range up to 4.5%-5.0% triggered a knee-jerk negative reaction in financial markets. Traditional stock market theory says higher risk-free rates squeeze equity valuations by raising corporate borrowing costs and the discount rate on future cash flows.

However, equity markets do not trade on interest rates in a vacuum; they trade on the reasons why those rates are moving. When a yield increase is driven by robust economic expansion rather than stagflation, stocks not only tolerate higher yields but appreciate with them. The domestic macroeconomic backdrop demonstrates why equities are equipped to absorb a 4.5-5.0% 10-year Treasury rate and push higher.

Interest rates rise for two primary reasons: (1) tightening monetary policy to combat inflation, or (2) expanding economic output. Current real U.S. Gross Domestic Product is running at a strong 4.4% pace for the third quarter, per the Atlanta Fed GDPNow reading released on September 10. When combined with a baseline inflation rate of around 2.5%, projected nominal GDP growth reaches nearly 7%.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

As long as nominal GDP growth (at, say, 7%) is greater than the 10-year Treasury yield, currently at about 5%, the stock market can remain constructively bullish. Corporate top-line revenue tracks nominal economic growth, not real (after inflation) GDP alone. If nominal economic output expands at nearly 7%, companies can generate sufficient revenue expansion to absorb a 4.5%–5.0% interest rate hurdle rate.

Historically, as long as top-line sales growth exceeds the risk-free rate, corporate profit margins remain durable. Whether this formula plays out now, as in past cycles, only time will tell, but it is important to note that prior to the 2008 Great Recession, 10-year Treasury yields were higher than modern investors are accustomed to seeing. Yields routinely averaged between roughly 5.0% and 5.5% from 1997 to 2006.

Equity markets did not just tolerate these higher rates back then – they experienced two of the strongest structural bull rallies in history. First, the Dot Com boom of 1995-1999 saw the 10-year yield trade in a range of 5.2% to 7.1% with the S&P 500 gaining 220%, or 25% annualized returns over that stretch. Then, in the 2003-2007 economic expansion, the 10-year yield traded rose from 3.3% to 5.2%, coming out of the dot com bust, reflecting broad global economic growth and corporate margin expansion.

The market narrative leading up to this week’s FOMC meeting is dominated by phenomenal earnings growth versus multiple contraction due to higher bond yields. While the 50-basis-point increase in 10-year yields recently witnessed can compress the S&P 500 forward P/E multiple slightly, say from 22x to 20x, robust economic activity delivers profit expansion that far outweighs this valuation haircut.

FactSet released their latest 3Q forecast on September 11. For Q3 2026, the estimated (year-over-year) earnings growth rate for the S&P 500 is 28.7%. If 28.7% is the actual growth rate for the quarter, it will mark the third-straight quarter of earnings growth above 25% for the index. All 11 S&P sectors are projected to report year-over-year growth. Five of these 11 sectors are predicted to report double-digit growth, led by the Energy, Information Technology, Communication Services, and Materials sectors.

On June 30, the estimated (year-over-year) earnings growth rate for the S&P 500 for Q3 2026 was 26.6%. For Q3 2026, 42 S&P 500 companies have issued negative EPS guidance, and 72 S&P 500 companies have issued positive EPS guidance. The forward 12-month P/E ratio for the S&P 500 is 19.1, below the 5-year average (19.8) but near the 10-year average (19.0). So far, the first two S&P 500 companies with Q3 results reported a positive EPS surprise, and both companies have reported a positive revenue surprise.

From the chart below, earnings for the S&P are trending notably higher. Coming into the quarter’s end in two-weeks, the market is not expensive on a historical basis.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

When S&P 500 earnings grow at double-digit rates, a mild contraction in P/E ratios results in a positive return for equities. Earnings are the key engine for stock prices, and a strong GDP ensures that corporate earnings remain on solid footing. S&P 500 companies also hold collective cash reserves exceeding $1.8 trillion. With short-term money market rates and 10-year Treasuries yielding near 5%, corporations are earning significant interest income on their cash holdings, effectively offsetting higher refinancing costs.

A primary bear case against higher yields is the burden of rising interest expense on corporate debt. However, U.S. large-cap corporations spent years refinancing debt at historically low fixed rates, and over 75% of S&P 500 corporate debt is structured into long-term, low-coupon, fixed-rate maturities.

Equity markets perform exceptionally well in a 4% to 5% yield regime because it reflects a healthy, non-recessionary economy, so high yields caused by economic vitality are usually a bull market catalyst.

Yes, there is some inflation evident in energy, food, travel and shelter, per the latest CPI report showing headline CPI up 0.4% month-over-month and 3.4% year-over-year. The core CPI (excluding food and energy) increased 0.3% over the month, with its annual pace easing slightly to 2.4%.

That said, a move in the 10-year Treasury yield to nearly 5.0% marks a return to historical norms. Driven by nominal inflation, forward-looking GDP growth of 4%+, double-digit corporate earnings growth, and AI-induced margin expansion, equities can absorb higher rates and appreciate to new record highs.