For much of the post-financial-crisis era, investors became accustomed to a relatively simple relationship: falling interest rates supported higher stock valuations, while rising rates created pressure on equities.

That relationship is being tested.

Government bond yields have climbed sharply across major developed economies, with the U.S., Japan, Germany and the U.K. all experiencing significant increases in borrowing costs. The Federal Reserve has also moved back toward tighter monetary policy, raising its benchmark rate to 3.75%-4.00% in September and signaling that additional increases could follow.

Yet stocks have not behaved as investors might expect from a conventional tightening cycle. Corporate earnings remain strong, business investment is accelerating and the artificial-intelligence investment boom is creating the possibility of faster productivity growth.

That creates an important distinction for advisors: higher interest rates are not necessarily the same thing as deteriorating economic conditions.

If rates are rising because inflation is accelerating and growth is overheating, equities can eventually face serious pressure. But if rates are rising because the economy can generate stronger growth and businesses can earn higher profits, stocks may be capable of absorbing substantially higher bond yields.

For wealth advisors, the challenge is determining which of those two environments is developing—and positioning client portfolios accordingly.

The Bond Market Is Sending a Growth Signal—And a Risk Signal

The global bond selloff is being driven by several forces at once.

Government borrowing requirements have increased, fiscal deficits remain substantial and businesses are also competing for capital to fund investment. At the same time, resilient economic activity and higher energy prices are complicating the inflation outlook.

Goldman Sachs describes the combination as governments and corporations effectively competing for the same pool of global savings.

That matters because the reason yields rise is almost as important as the level to which they rise.

A 10-year Treasury yield moving higher because investors expect stronger nominal GDP growth is fundamentally different from a yield rising because investors fear a loss of inflation control or fiscal credibility.

The former can coexist with rising equity prices. The latter can compress valuations while simultaneously undermining earnings expectations.

This is why advisors should resist treating the 10-year Treasury yield as a simple “risk-off” indicator.

Instead, ask what is driving it.

If rising yields are accompanied by rising earnings estimates, strong capital spending and healthy consumer demand, the equity market has an economic foundation underneath it. If yields are rising while earnings expectations deteriorate, credit spreads widen and economic activity slows, the equation becomes considerably less favorable.

The Economy Is Showing More Resilience Than Higher Rates Would Suggest

There is evidence that the economy has entered this higher-rate environment with considerable momentum.

Federal Reserve Governor Christopher Waller noted in early September that real GDP grew at a 1.8% annual rate during the first half of 2026, while real private domestic final purchases increased at a 3% pace. Business investment has remained strong, particularly in technology and AI-related infrastructure.

Federal Reserve Chairman Kevin Warsh has similarly emphasized the economy’s resilience. At Jackson Hole, he noted that equipment and intangible investment had been growing at roughly a 9% four-quarter pace, the strongest growth since 2021, with more than half of this year’s capital-expenditure growth potentially attributable to AI-related investment. He also pointed to S&P 500 profits growing more than 20% over the prior year.

That combination is unusual.

Normally, tighter financial conditions are designed to slow demand. But if businesses are simultaneously investing heavily in technologies that can increase productivity, the economy may be able to grow despite a higher cost of capital.

This is the critical investment question.

What if the neutral interest rate—the rate consistent with neither stimulating nor restraining economic activity—is itself moving higher because the economy’s productive capacity is improving?

The Fed’s latest projections put the longer-run federal funds rate around 3.25%, up from 3.1% previously. European and Japanese estimates of neutral rates have also moved higher.

That suggests investors may need to reconsider what constitutes “normal” interest rates.

AI Changes the Traditional Rate-and-Stock Equation

AI investment is central to this discussion because it has the potential to affect both sides of the equation.

Initially, AI requires enormous amounts of capital.

Data centers, semiconductors, networking equipment, power generation and cloud infrastructure require companies to spend heavily today for uncertain future returns. That creates demand for financing at exactly the time governments are also issuing large quantities of debt.

That helps push bond yields higher.

But if those investments eventually produce meaningful productivity gains, they can also increase corporate revenues, operating margins and economic growth.

Warsh has described AI as potentially becoming a new factor of production, while noting that the timing and distribution of the resulting economic benefits remain uncertain.

For investors, this creates a fascinating feedback loop:

Higher investment → higher capital demand → higher yields → potential productivity gains → stronger economic growth → higher corporate earnings.

Stocks can potentially withstand higher interest rates when the last two components are strong enough.

The danger is assuming that every dollar of AI investment will automatically translate into shareholder returns. It won’t. The beneficiaries of the technology may change over time, and heavy capital spending can produce disappointing returns if supply ultimately exceeds demand.

Advisors therefore need to distinguish between economic growth created by AI and stock-market returns created by owning AI-related companies at increasingly demanding valuations.

Those are not the same thing.

Earnings May Matter More Than Multiples

This is where the current environment becomes particularly important for portfolio construction.

Higher bond yields generally place downward pressure on equity valuation multiples because investors have a more attractive alternative to stocks. The discount rate applied to future cash flows rises, making distant earnings less valuable today.

But earnings growth can offset some of that valuation pressure.

Consider two companies.

Company A has stagnant earnings but trades at 25 times profits. If Treasury yields rise materially, investors may decide they no longer need to pay such a premium.

Company B also trades at 25 times earnings, but its profits are growing 20% annually because revenue and productivity are accelerating.

The second company still faces valuation risk. But its earnings growth gives investors something that can compensate for a portion of multiple compression.

That is why the resilience of corporate profitability is so important.

Warsh reported that S&P 500 profits had increased by more than 20% over the previous year and that profit margins remained elevated.

The investment implication is not that stocks are immune to higher rates. It is that earnings growth can become the dominant source of equity returns when valuation expansion is no longer available.

That is a very different market regime from the one investors enjoyed when falling yields and expanding multiples did much of the work.

Advisors Should Prepare Clients for a More Normalized Market

For advisors, one of the most useful conversations may be explaining that a higher-rate environment does not automatically mean abandoning equities.

It means changing the source of the equity thesis.

During the era of ultra-low interest rates, investors could reasonably expect declining yields, expanding valuations and abundant liquidity to support asset prices.

That framework is less reliable today.

Instead, advisors should emphasize:

• Earnings quality: Companies need genuine revenue and cash-flow growth, not merely attractive narratives.
• Balance-sheet strength: Higher refinancing costs make leverage more consequential.
• Capital efficiency: Heavy investment spending needs to generate acceptable returns.
• Pricing power: Businesses that can protect margins are better positioned when inflation remains persistent.
• Valuation discipline: Even exceptional businesses can produce disappointing returns when purchased at excessive prices.
• Sector diversification: Higher rates affect technology, housing, financials, industrials and consumer businesses differently.

This also argues for more nuanced fixed-income conversations.

A higher-rate environment creates pain for existing long-duration bonds, but it also creates an opportunity: newly purchased bonds can offer substantially better income than investors became accustomed to during the zero-rate era.

That changes the role of bonds in a portfolio.

They can once again provide meaningful income and diversification without requiring investors to depend primarily on capital appreciation.

The Real Risk Is a Growth-Rates Mismatch

The most important scenario for advisors to monitor may not be “rates rise.”

It is rates rise faster than earnings and economic productivity can absorb them.

There are already signs of strain at the weaker end of the credit market. Recent reporting indicates that borrowing costs for low-rated companies have risen sharply, while investment-grade borrowers have remained considerably more resilient.

That distinction is important.

A strong economy can tolerate higher rates for financially healthy businesses. It is much less forgiving toward companies that depend on inexpensive refinancing, aggressive leverage, or perpetual access to capital markets.

Advisors should therefore watch credit spreads alongside Treasury yields.

If Treasury yields rise while credit spreads remain relatively contained, markets may be signaling that investors believe the economy can support the higher cost of capital.

If Treasury yields rise while credit spreads widen materially, the message changes. Investors are demanding greater compensation for corporate risk, suggesting that higher rates are beginning to impair balance sheets and economic activity.

That is a far more consequential warning sign for equities.

The Advisor’s Bottom Line

The traditional investment narrative says rising interest rates are bad for stocks.

The more useful framework is conditional:

Rising rates can be compatible with rising stock prices when economic growth, productivity and corporate earnings are strong enough to offset the valuation pressure created by higher discount rates.

That appears to be one of the central questions facing markets now.

The Fed’s own projections still anticipate economic growth, while policymakers have acknowledged the unusual strength of business investment and the potentially transformative role of AI.

But there is no guarantee that today’s investment boom will translate smoothly into tomorrow’s productivity gains. Inflation remains a constraint, government borrowing is substantial, and higher yields eventually affect households and businesses through mortgages, corporate refinancing and other borrowing costs.

For wealth advisors, the appropriate response is neither complacency nor reflexive defensiveness.

It is to help clients understand what is driving the rates move.

If higher yields reflect a stronger economy, rising productivity and expanding corporate earnings, equities may continue to perform even as bonds become more attractive.

If yields rise because inflation becomes entrenched, fiscal concerns intensify, and economic growth begins to deteriorate, the same increase in rates can become a much more serious threat.

The portfolio implication is straightforward: focus less on predicting the next move in the 10-year Treasury and more on monitoring the relationship among growth, inflation, earnings, credit conditions and valuations.

That is the framework that can help advisors navigate a market in which higher rates are no longer simply a headwind—but potentially also evidence that the economy has entered a stronger, more productive phase.