Markets are increasingly viewing elevated interest rates as the harbinger of doom for US equity valuations. The 30-year Treasury yield has climbed to roughly 5.40%, its highest level in nearly two decades; long-duration Treasuries have fallen about 10% over the past year, and the S&P 500's forward price-to-earnings multiple has been compressed by approximately three points. Yet, despite this, US stocks have still managed to gain around 16%.

A report from JPMorgan released on September 14 arrives at a strikingly different conclusion: the current rise in rates remains some distance from genuinely pressuring valuations, and the key determinant of the valuation ceiling is not the yield level itself, but rather the pace of earnings growth.

After categorizing valuation data since 1950 by earnings growth brackets, the team found an "inverted U-shaped" relationship between 10-year Treasury yields and the S&P 500's valuation multiple. When yields rise moderately in the early phase, valuations may actually find support; only after breaching a certain threshold does upward pressure on rates begin to noticeably compress valuations. Based on current earnings levels, that threshold corresponds to a 10-year Treasury yield of approximately 5% to 6%.

More broadly, Wall Street strategists have not interpreted a potential Federal Reserve rate hike as a signal for the end of the bull market. Strategists at Goldman Sachs, Morgan Stanley, and JPMorgan all argue that as long as economic growth and corporate earnings remain resilient, any market pullback triggered by moderate rate increases is likely to be a short-term fluctuation.

Ben Snider, Chief US Equity Strategist at Goldman Sachs, noted that markets have already priced in more than three rate hikes over the next year, while corporate earnings and balance sheets remain robust. Bloomberg data also indicates that historically, it is typically a complete tightening cycle—rather than a single rate hike—that truly threatens a bull market.

The 5%-6% Threshold for Valuation Pressure

In the first tier, a super-growth environment with earnings growth above 20%, valuation multiples can be supported up to around 24 times, corresponding to a 10-year Treasury yield of about 6%. The second tier, characterized by above-trend growth with earnings growth of 10%-20%, supports a valuation multiple of approximately 20 times, corresponding to a yield of around 5%. Overall, the lower the earnings growth rate, the lower the level of interest rates the market can tolerate.

Currently, the S&P 500 is trading at roughly 22 times 2026 EPS, implying an adjusted earnings growth rate of about 28% for 2026; the 2027 valuation stands at approximately 18 times, with an implied earnings growth rate of about 21% (excluding one-time investment gains and losses). This suggests that as long as earnings growth can be sustained above 15%, there remains room for further re-rating of 2027 valuations.

There is another yardstick for measuring whether valuations are expensive. The two-stage dividend discount model indicates that the current implied equity risk premium is roughly 7.2%, sitting at the 69th percentile historically; the long-term PEG ratio is around 2 times. In other words, as long as companies can deliver annual earnings growth of 13%-15%, current valuation levels remain broadly supported by fundamentals.

The 30 leading AI-related stocks currently trade at approximately 30 times forward earnings, compared with around 19 times for the remaining 470 S&P 500 constituents and about 14.3 times for MSCI ACWI peers. This valuation premium primarily stems from stronger earnings visibility, lower leverage ratios, and more stable shareholder returns.

Productivity serves as another buffer. If productivity remains within the 1.5%-2.5% range, current yields can still support a valuation of roughly 20 times; if AI further drives productivity above 2.5%, the support for valuations would be even stronger.

How Rates Transmit to Earnings: First Examine Debt Structure, Then Cash Flow

The impact of rising interest expenses on corporate earnings is gradual, as corporate debt is predominantly structured with fixed rates and long maturities.

In the near term, two forces are sufficient to partially offset the pressure from higher financing costs: first, improved profitability in the financial sector, and second, companies still holding approximately $2.4 trillion in cash, which can now generate higher interest income. Meanwhile, current borrowing costs for most companies remain below their 2023 peaks: the 30-year fixed mortgage rate is about 6.8%, down from 8.1% in 2023; investment-grade bond yields are around 6%, down from 6.5%; and high-yield bond yields are approximately 7.7%, down from 9.6%.

The pressure truly worth watching comes from structural divergence. A "higher for longer" rate environment is squeezing consumption-related activities, residential and commercial real estate, as well as capital-intensive industries and highly leveraged companies that do not directly benefit from AI infrastructure buildout.

The report describes this process as an "invisible hand": limited capital is flowing toward borrowers who can pay the highest price and possess the best credit quality—governments and large multinational corporations. Consequently, higher rates do not necessarily mean a broad-based blow to overall corporate earnings, but they will significantly intensify divergence within the market.

Curve Shape Dictates Sector Leadership

Sector leadership also depends on how the yield curve evolves.

If a bear steepening occurs—where the spread between short and long maturities widens—cyclical sectors such as energy and financials are more likely to benefit; if a bear flattening occurs, technology stocks tend to hold the advantage. Meanwhile, bond proxies and long-duration non-tech sectors—including utilities, real estate, communication services, and consumer staples—are most sensitive to rising rates.

In terms of style, the base case remains a shallow rate-hiking cycle, meaning last year's "insurance cut" expectations have been reversed but without escalating into aggressive tightening. In this scenario, growth stocks and quality growth stocks are still likely to maintain their edge; if inflation re-accelerates and the market begins pricing in a broader rate-hike cycle—an additional four to five hikes—investment style may shift toward low volatility.

Looking at market-cap style, large-cap stocks demonstrate greater resilience. Small-cap stocks, in contrast, rely more heavily on short-term bank floating-rate financing, making monetary policy transmission more direct and the impact more severe.

The report also contends that the current rise in rates is primarily driven by fundamentals, rather than by concerns over Fed independence or the credibility of US fiscal policy. Long-end swap spreads remain relatively stable, and long-term breakeven inflation rates have only risen modestly.