High interest rates aren't the "endgame" for US stocks; profitability is.

The market is viewing "high interest rates" as the end of US stock valuations. The 30-year US Treasury yield has risen to about 5.40%, the highest in nearly 20 years; long-term US Treasury bonds have fallen by about 10% over the past year, and the S&P 500's forward price-to-earnings ratio has been compressed by about 3 times. But at the same time, US stocks have still risen by about 16%.

A report released by JPMorgan Chase on September 14th reached a completely different conclusion: this round of interest rate increases is still some distance away from truly suppressing valuations, and the key to determining the valuation ceiling is not the yield itself, but the profit growth rate.

The team analyzed valuation data since 1950, categorized by earnings growth rate, and found an inverted U-shaped relationship between the 10-year US Treasury yield and the S&P 500 valuation multiple. This means that when yields rise moderately in the early stages, valuations may actually be supported; only after exceeding a certain threshold will rising interest rates begin to significantly compress valuations. Based on current earnings levels, this threshold corresponds to a 10-year US Treasury yield of approximately 5% to 6%.

More broadly, Wall Street strategists do not view the Federal Reserve's renewed interest rate hikes as a signal of the end of the bull market. Strategists at Goldman Sachs, Morgan Stanley, and JPMorgan Chase all believe that as long as economic growth and corporate profits remain resilient, the market correction triggered by moderate rate hikes is likely to be just a short-term fluctuation.

Goldman Sachs' chief U.S. equity strategist, Ben Snider, said the market has already priced in more than three rate hikes in the coming year, while corporate earnings and balance sheets remain strong; Bloomberg statistics also show that historically, what really threatens a bull market is usually a complete rate hike cycle, rather than a single rate hike.

The threshold for real valuation pressure is 5%-6%.

The first tier represents a super-growth environment with earnings growth exceeding 20%, where valuation multiples can be supported up to approximately 24 times, corresponding to a 10-year US Treasury yield of about 6%. The second tier represents an above-trend growth environment with earnings growth of 10%-20%, where valuation multiples are around 20 times, corresponding to a yield of about 5% . Overall, the lower the earnings growth rate, the lower the yield level the market can tolerate.

Currently, the S&P 500 is trading at approximately 22 times its 2026 EPS, corresponding to an adjusted 2026 earnings growth rate of about 28%. The 2027 valuation is around 18 times earnings, implying an earnings growth rate of about 21% (excluding one-time investment gains and losses). This means that as long as earnings growth can be maintained above 15%, there is still room for further valuation reassessment in 2027.

There's another metric for assessing whether a valuation is expensive. A two-stage dividend discount model shows that the current implied equity risk premium is approximately 7.2%, at the 69th percentile historically; the long-term PEG ratio is around 2. In other words, as long as the company can deliver an average annual profit growth rate of 13%-15%, the current valuation level is largely supported by fundamentals.

The top 30 AI companies currently have a forward valuation of around 30 times earnings, compared to approximately 19 times earnings for the remaining 470 S&P 500 constituents and 14.3 times earnings for their MSCI ACWI peers. This valuation premium primarily stems from stronger earnings visibility, lower leverage ratios, and more stable shareholder returns.

Productivity provides another buffer. If productivity remains within the 1.5%-2.5% range, the current yield can still support a valuation of around 20 times earnings; if AI further drives productivity above 2.5%, the valuation will receive even stronger support.

How interest rates are transmitted to profits: First look at the debt structure, then look at the cash flow.

The impact of rising interest expenses on corporate profits is gradual, because corporate debt is mainly financed by fixed-rate, long-term debt.

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

The real pressure to watch comes from structural differentiation. The “higher and longer” interest rate environment is crowding out consumer-related activities, residential and commercial real estate, as well as capital-intensive industries and highly leveraged companies that do not directly benefit from AI development.

The report describes this process as an "invisible hand": limited capital is flowing to the highest-paying, highest-credit-quality borrowers—governments and large multinational corporations. Therefore, higher interest rates do not necessarily mean a comprehensive blow to overall corporate profitability, but they will significantly exacerbate market segmentation.

Curve shape determines sector: steep curves indicate buying cyclical stocks, flat curves indicate buying technology stocks.

Sector leadership also depends on how the yield curve changes.

If the bear market steepens, meaning the spread between short-term and long-term interest rates widens, cyclical sectors such as energy and finance are more likely to benefit; if the bear market flattens, technology stocks will outperform. Meanwhile, bond substitutes and long-duration non-technology sectors—including utilities, real estate, communication services, and consumer staples—are most sensitive to rising interest rates.

In terms of style, the baseline scenario remains a shallow rate hike cycle, meaning that last year's "insurance-style" rate cut expectations have reversed, but have not evolved into aggressive tightening. Under this scenario, growth stocks and high-quality growth stocks are expected to maintain their advantage; if inflation accelerates again and the market begins to price in a broader rate hike cycle, i.e., 4-5 more rate hikes, then the investment style may shift to low volatility.

In terms of market capitalization, large-cap stocks are more resilient to pressure. In contrast, small-cap stocks rely more on short-term floating-rate bank financing, making them more susceptible to the direct transmission of monetary policy and thus more vulnerable to shocks.

The report also argues that the current interest rate hikes are primarily driven by fundamentals, rather than market concerns about the Federal Reserve's independence or the credibility of US fiscal policy. Long-term swap spreads have remained relatively stable, and the long-term break-even inflation rate has only risen slightly.

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