Musings on Markets is the personal blog of Aswath Damodaran, professor of finance at NYU Stern and widely known as the "Dean of Valuation." Running since 2008, it publishes hands-on intrinsic-value teardowns of headline companies (SpaceX, Tesla, Nvidia) using his narrative-and-numbers DCF framework, plus periodic market-wide reviews.
This article argues that rising interest rates don't always hurt stocks. Damodaran says that despite the 10-year Treasury yield climbing to 4.75% in 2026, corporate earnings grew over 11%, keeping the market resilient. He is cautiously optimistic, noting rates could still rise but the market is highly uneven. Key holdings: S&P 500 (earnings upgrades support prices), tech sector (top companies up 25%, median only 7.75%), and high-yield bonds (CCC-rated spreads widened 1.57%, a risk signal).
One-sentence summary: Rising interest rates in 2026 did not crush U.S. stocks, as corporate earnings growth offset discount rate pressure, but market divergence is severe, and the widening of high-yield bond spreads has already sent a risk signal. [Cautiously Optimistic]
The article points out that interest rate concerns have resurfaced in 2026 for three major reasons, but the author argues that the relationship between interest rates and stock prices is far more complex than it appears on the surface. The author states at the outset: “The war in Iran, oil prices and worries about a recession have all taken turns driving stock prices in 2026 but talk about interest rates and where they are going has been a constant concern all year.” This means that while the market in 2026 has been driven by multiple alternating factors, the topic of interest rates and their trajectory has been a persistent concern throughout the year.
The three major reasons are as follows:
The author emphasizes that interest rate movements should not be simplistically attributed to the Fed: “I know that there are some who attribute almost everything related to interest rates to the Fed, and while I think that is simplistic and wrong-headed to do so.” This means that the Fed is not the sole arbiter of interest rates; fundamental factors are the true long-term drivers.
Using a chart of interest rate trends from 1962 to 2026, the author notes that the current 10-year yield of 4.75% represents a "breakout" but remains well below the historical highs of the 1980s. Key historical milestones include:
| Time Period | 10-Year U.S. Treasury Yield Range | Key Events |
|---|---|---|
| 1970s-1981 | Peak above 15% | Inflation spiraled out of control; the Fed aggressively raised rates |
| 1980s-1990s | 6-9% | Rates gradually declined but remained elevated |
| 2009-2021 | 0-3% | Quantitative easing after the financial crisis; rates fell below 1% post-pandemic |
| 2022 | 1.52%→3.88% | Inflation surged; rates doubled |
| September 2026 | 4.75% | Broke out of the 4-4.5% range but remained below the intrinsic value of 5.41% |
The article compares 10-year government bond yields across major global economies, showing that the rise in interest rates in 2026 is a widespread phenomenon, though the magnitude and starting points vary. The author tracks government bond rates for five currency blocs: the euro (German 10-year), Japanese yen, Australian dollar, Canadian dollar, and British pound, as well as four emerging market currencies: the Chinese yuan, Indian rupee, Brazilian real, and South African rand.
Key findings include:
The core investment implication of the article is that the impact of rising interest rates on the stock market varies by sector and company, with high rates hitting highly leveraged or growth-oriented companies harder while having a lesser effect on companies with stable cash flows. The author first proposed this framework in 2022 and reiterates it in 2026. Investors should focus on:
The impact of rising interest rates on bond values is direct, but on stock values it is more complex, depending on the relative changes in cash flows and discount rates. The report points out that bond coupons are fixed, so rising interest rates directly increase the discount rate and reduce present values; in contrast, the future cash flows of stocks are residual cash flows from business operations, which adjust as interest rates change.
The author states: “With stocks, the effect of higher interest rates is not as direct for a simple reason. The expected cash flows on stocks are the residual cash flows from operations at businesses, and these residual cash flows reflect the revenues, earnings and reinvestment at these businesses.” This means: “For stocks, the impact of higher interest rates is not so straightforward for a simple reason. The expected cash flows of stocks are the residual cash flows from business operations, and these residual cash flows reflect the company’s revenues, profits, and reinvestment.”
The report further breaks down how rising interest rates affect stock values through three operational metrics:
Consequently, companies fall into three categories in response to rising interest rates: value declines (discount rate effect dominates), value remains unchanged (the two effects offset each other), and value rises (cash flow growth outpaces the increase in the discount rate).
In 2026, yields on U.S. corporate bonds rose broadly, but credit spreads widened significantly only for the lowest-rated bonds. Citing Federal Reserve data (FRED), the report shows that as of August 31, 2026, the 10-year U.S. Treasury yield rose from 4.18% at the start of the year to 4.75%, with corporate bond yields across all ratings moving higher in tandem. However, except for high-yield bonds rated CCC and below, credit spreads for other ratings (AAA, AA, A, BBB, BB, B) remained largely flat or narrowed. Credit spreads for CCC and below widened by 1.57% over the year.
| Rating Category | Change in Credit Spread (Jan–Aug 2026) |
|---|---|
| AAA, AA, A, BBB, BB, B | Largely unchanged or narrowed |
| CCC and below (High-Yield) | Widened by 1.57% |
The report notes that this has a direct impact on corporate borrowing and capital costs: the rise in global corporate debt costs comes almost entirely from the increase in the risk-free rate, while borrowers with the highest default risk bear additional costs. For long-term corporate bond investors, bond prices fell in 2026, but “the effect is nowhere near the carnage that we saw in 2022,” partly because the magnitude of rate changes was more moderate and the price effect was larger in early 2022 when rates were extremely low.
In the first eight months of 2026, U.S. stock indices rose overall, but on days with large interest rate swings, stock performance showed a clear negative correlation with the direction of rates. The report’s data shows that the S&P 500 and Nasdaq both posted strong gains from January to August 2026. The author further analyzed the relationship between daily changes in the 10-year U.S. Treasury yield and S&P 500 daily returns: out of 169 trading days, yields rose on 84 days, fell on 73 days, and were flat on 12 days. When yields moved by more than 3 basis points in a single day, the S&P 500 fell by an average of approximately 0.5% (on days yields rose) or rose by approximately 0.5% (on days yields fell).
| Daily Change in 10-Year U.S. Treasury Yield | Number of Trading Days | Average Daily S&P 500 Return |
|---|---|---|
| Rise > 3 bps | Not specified | Approximately -0.5% |
| Fall > 3 bps | Not specified | Approximately +0.5% |
| Change ≤ 3 bps or flat | Not specified | Near 0% |
The report argues that the secret to U.S. stocks’ resilience in the face of rising rates in 2026 lies in earnings growth: analysts raised their estimates for S&P 500 earnings per share for both 2026 and 2027 by more than 11% over the year. The author states: “Over the first eight months of 2026, analysts who track the S&P 500 companies have raised their estimates for corporate earnings by more than 11% for both 2026 and 2027, indicating that companies are finding ways to get more to the bottom line, in the face of macro concerns and higher rates.” This means: “In the first eight months of 2026, analysts tracking S&P 500 companies raised their corporate earnings estimates for both 2026 and 2027 by more than 11%, indicating that companies are finding ways to improve their bottom lines amid macro concerns and higher rates.” The author also notes skepticism about these earnings figures and plans to analyze the impact of AI on earnings in a follow-up article.
The report’s core judgment is that in 2026, the impact of rising interest rates on the stock market was offset by corporate earnings growth, but investors should focus on the divergence between interest-rate-sensitive sectors (such as highly leveraged or growth companies) and companies with stable cash flows. Institutional bias note: As a valuation scholar, the author emphasizes earnings growth as the key to stock market resilience, but readers should be aware that earnings expectations may include optimistic factors such as AI narratives, and the widening of credit spreads in the high-yield bond market has already signaled risk.
The energy sector performed best in 2026 (benefiting from a surge in oil prices), followed by the technology sector, but gains were highly concentrated among top-tier companies. The author points out that the technology sector's overall market capitalization rose by 25.22%, yet the median company's return was only 7.75%, indicating that "it is clearly the largest tech companies that are driving the returns." The consumer sector (both discretionary and staples), utilities, and communication services performed the worst, due to weaker pricing power and rising input costs.
| Sector | Overall Market Cap Gain | Median Company Gain | Author's Attribution |
|---|---|---|---|
| Energy | Best (specific figure not provided) | Not provided | Surge in oil prices |
| Technology | 25.22% | 7.75% | Driven by top-tier companies |
| Consumer/Utilities/Communication | Worst | Not provided | Weak pricing power, high costs |
Global equity markets added approximately $17 trillion in total market capitalization (+11.28%) in 2026 (as of August 31), but regional disparities were significant. The author emphasizes that Indian and Chinese equity markets struggled, posting only low single-digit returns, with declining stocks far outnumbering advancing ones. Part of the performance divergence stems from currency fluctuations—currencies that appreciated against the U.S. dollar boosted dollar-denominated returns, while the opposite dragged them down.
The author argues that the debate over whether the Federal Reserve can alter the interest rate path is "pointless," as rate movements are driven by fundamentals. He observes that the 10-year U.S. Treasury yield has remained stable in a narrow range of 4%-5% since 2022, due to expected inflation stabilizing at around 2.5% (despite actual inflation volatility). The author states: "For rates to change significantly, up or down, there has to be a break in inflation expectations." He judges that neither incoming Fed Chair Kevin Warsh nor Treasury Secretary Scott Bessent is likely to change this trajectory.
Companies have adapted to the high-interest-rate environment, and the market has priced in higher earnings. The author believes that the pain of transitioning from low to high interest rates was most acute in 2022, and both companies and markets have since adapted quickly—companies have found ways to boost profitability under high rates, while the market has priced these earnings as solid returns. Institutional perspective bias: As a value investing advocate, the author's argument that "rates are determined by fundamentals" may downplay the short-term impact of policy interventions. Readers should be mindful of potential market sentiment volatility around FOMC meetings in 2026.
| Instrument | Direction | Author's One-Sentence View | Key Data |
|---|---|---|---|
| S&P 500 | Hold & Observe | Earnings growth offsets interest rate pressure, but gains are concentrated in top companies | Overall up in the first 8 months of 2026; analysts raised earnings expectations by over 11% |
| Nasdaq | Hold & Observe | Tech giants drive the index, but the median company performs far weaker than the overall | Tech sector market cap gain 25.22%, median company only 7.75% |
| Energy Sector | Hold & Observe | Benefiting from surging oil prices, best performer in 2026 | No specific figure cited, but attributed to oil price surge |
| Tech Sector (Top Companies) | Hold & Observe | Core force driving sector returns | Market cap gain 25.22%, median company only 7.75% |
| Consumer/Utilities/Communication Sectors | Hold & Observe | Worst performers due to weak pricing power and high input costs | No specific figure cited |
| Indian Stock Market | Hold & Observe | Struggling, low single-digit gains | Low single-digit returns, number of declining stocks far exceeds advancing ones |
| Chinese Stock Market | Hold & Observe | Struggling, low single-digit gains | Low single-digit returns, number of declining stocks far exceeds advancing ones |
| High-Yield Bonds (CCC and below) | Not explicitly stated | Credit spreads widened, the only significant risk exposure | Spreads widened by 1.57% (Jan–Aug 2026) |