Stock Market Insights: A strange combination and a resilient stock market
Joe Shearrer, CPFA® is Vice President and Wealth Advisor at Fervent Wealth Management.
One of the more surprising stories in financial markets this year has been the resilience of stocks despite a significant rise in interest rates. The yield on the 10-year U.S. Treasury recently crossed 5%, reaching its highest level since 2007. At the same time, the S&P 500 remains up double digits for the year and, despite some recent weakness, is still less than 3% below its August record high.
Normally, those two things don't necessarily go together. That phrase made me think about a recent trip to Taco Bell with my kids. Since we were eating inside, they got to make their own drinks from the self-serve soda machines. As usual, they decided one soda wasn't enough. They mixed two different flavors together to create their own combination. I looked at them and thought, I'm pretty sure those two things aren't supposed to go together. However, for some reason they seemed to like it.
Financial markets can sometimes give us that same thought. You can have two things that don't traditionally seem to belong together sitting side by side. Higher Treasury yields create competition for stocks. When investors can earn around 5% on a 10-year Treasury, they may become less willing to pay high valuations for equities. Higher rates can also increase borrowing costs for businesses and consumers.
We are already seeing some of that pressure show up in stock valuations. The S&P 500's forward price-to-earnings ratio has fallen to around 19 times expected earnings. So why haven't stocks fallen more? The answer, at least so far, has been earnings.
Think of stock prices as being influenced by two sides of a scale: what investors are willing to pay for each dollar of earnings and how much those companies actually earn. Higher interest rates can push the first side of the scale lower by making stocks less attractive at elevated valuations. However, when corporate earnings are growing, that growth can help counterbalance the pressure. That appears to be an important part of the story playing out in the market today.
Corporate earnings have continued to grow, helping offset the decline in valuations. AI investment has played an important role, with enormous amounts of capital being invested in data centers, semiconductors and other infrastructure needed to support the continued expansion of AI. That creates an important distinction for investors. A 5% Treasury yield by itself doesn't necessarily mean stocks have to fall. The bigger concern would be a rapid, disorderly increase in rates or a situation where higher borrowing costs begin materially hurting corporate profits.
There are certainly reasons for caution. Higher interest rates, elevated oil prices, geopolitical uncertainty and still-elevated stock valuations create plenty of opportunities for volatility. A normal 5% to 10% market pullback shouldn't surprise anyone after the gains we've experienced. That said, volatility and a deteriorating investment environment aren't necessarily the same thing.
Rather than focusing on one particular interest-rate level, investors may be better served watching the relationship between rates and corporate earnings. If earnings continue growing, the market may be able to absorb higher rates better than many expect. If profits begin weakening while rates remain elevated, however, that would be a much more meaningful warning sign.
And just like my kids' self-created soda combinations, sometimes two things that don't seem like they should go together can work just fine. The important question is whether the combination continues to work.
Have a blessed week!
Joe Shearrer
Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.
Opinions voiced above are for general information only and not intended as specific advice or recommendations for any person. All performance cited is historical and is no guarantee of future results. All indices are unmanaged and may not be invested directly. Market conditions and Fed expectations can change quickly. This article reflects information available on the morning of September 16, 2026, before any Federal Reserve announcement.
All investing involves risk, including loss of principal. No strategy assures success or protects against loss. Any economic forecast outlined in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.
Fervent Wealth Management is a financial management and services entity in Springfield, Missouri.
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