Assenagon Study Reveals How Rising Interest Rates Affect Equity Markets

• Historical analysis since 1960: No recession began during 12 of the 16 US periods of rising bond yields examined.
• Strong earnings support equities: Since October 2025, the S&P 500 has gained around 10% in real terms, despite higher bond yields and lower valuations.
• Growth and monetary policy in focus: AI investment is currently supporting earnings, while the energy price shock and tighter monetary policy increase risks.

In early October 2026, the yield on 10-year US Treasuries rose above 5.30%, reaching its highest level since 2002. Alongside large fiscal deficits and growing bond supply, the AI investment boom and inflationary pressures following the energy price shock are pushing yields higher.

How do rising interest rates and bond yields affect equity valuations? Thomas Romig, CIO Multi Asset at Assenagon, and his colleague Sebastian Schmider, Head of AI Solutions & Macro, explore this question in their latest study. The two experts examined 16 periods of rising US bond yields since 1960. “The relationship between interest rates and equities is complex,” says Schmider. “What matters is why rates are rising and how that increase feeds through to corporate valuations and earnings.”

The historical analysis shows that equity performance depended above all on whether a recession began while yields were rising. These findings are particularly relevant in light of recent yield movements.
 

Rising Rates and Equity Prices: Why Corporate Earnings Matter

Higher interest rates affect equity markets through two opposing forces. Government bonds offering higher yields become a more attractive alternative to equities. At the same time, the present value of future corporate earnings falls when those earnings are discounted at a higher rate. Both factors tend to weigh on equity valuations.

Yet rising rates can also reflect a strong economy. High investment and robust demand increase the need for capital while supporting corporate revenues and earnings. If earnings grow strongly enough, share prices can therefore rise even as price-to-earnings (P/E) ratios fall. “Whether equities can withstand rising rates depends on which of these two forces prevails,” says Romig.
 

US Equities Since 1960: Recessions Erode the Earnings Cushion

In their historical study, the Assenagon experts examine periods in which the 10-year US Treasury yield rose by at least one percentage point from a trough to the subsequent peak. No recession began during 12 of the 16 periods identified. In the other four, a recession started before yields peaked.

This distinction proves crucial. “As long as the economy continued to expand, earnings growth was often able to offset the pressure on valuations. When the economy slipped into recession, that cushion weakened or disappeared altogether,” says Romig. In three of the four recession episodes, corporate earnings were already falling while yields were still rising.

The period from 1971 to 1974 shows, however, that even rising earnings do not always provide reliable protection. Double-digit inflation forced the Federal Reserve to tighten monetary policy sharply. The P/E ratio fell by more than half, overwhelming the support from continued earnings growth.

S&P 500: Earnings Growth More Than Offsets Lower Valuations

Corporate earnings have so far supported US equities during the current rise in yields. Since October 2025, the 10-year US Treasury yield has risen by around 125 basis points. Over the same period, the S&P 500’s P/E ratio has fallen by approximately 13%. Yet the index has gained around 10% in real terms, supported by an increase of roughly 26% in real earnings per share. Earnings growth has thus more than offset the decline in valuations.
 

AI Investment and Monetary Policy Shape the Outlook

Assenagon believes the growth impulse currently has the upper hand. While the AI investment boom increases demand for capital and pushes yields higher, it also supports the earnings of companies benefiting from that investment.

The main risks stem from the energy price shock and the prospect of further monetary tightening. After the Federal Reserve raised policy rates in September for the first time since 2023, the key question is how much further tightening will be needed. For investors, the resilience of the economy and corporate earnings therefore matters more than any particular interest rate threshold.

The full study is available in the latest edition of Assenagon Perspectives.

Munich/Frankfurt, 3 November 2026