Lower-than-expected inflation, a weaker labor market, and falling consumer confidence have raised hopes that the Fed will keep rates unchanged in October, easing some pressure on bonds.
Still, the growing fiscal deficit and the war in the Middle East remain unresolved, so even if the Fed turns dovish, a return to 2021 levels still seems unlikely.
Seems like the stock market shouldn’t be doing this well in this environment, yet the Nasdaq gained 1.05% on Monday, hit a new record high, helping Musk rejoin the trillionaire club. But why, if higher borrowing costs mean companies pay more to refinance debt and fund new projects and acquisitions, while higher Treasury yields make high stock valuations harder to justify?
Because there are more variables in the equation.
For starters, the US economy remains resilient, with Q2 2026 GDP growth revised up to 2.2% from 1.5%, while early Q3 data looks even more encouraging, despite slower job creation. Hence, S&P 500 earnings are expected to grow 29.5% year over year in Q3 2026, marking the third straight quarter of growth above 25%.
As for the impact of high energy prices, although they hurt consumers, a recent NBER study found that since the shale revolution turned the US into a net oil exporter, higher oil prices can actually boost incomes, consumption, and investment across the economy while improving the country’s terms of trade.
Let’s see what the quarterly reports say about the impact of higher energy prices, especially on tech companies that rely heavily on chips, and whether bottlenecks in the Strait of Hormuz could disrupt chip production by affecting helium supplies.
As for bonds becoming more attractive, investors may still prefer stocks if earnings are growing fast enough to justify high valuations, which may not be that high after all, given that the S&P 500’s forward P/E has fallen this year even as earnings have continued to rise.
That doesn’t mean there’s nothing to worry about with higher yields.
As yields rise, borrowing costs go up, putting pressure on weaker companies, especially those with heavy debt loads that need to refinance at higher rates. Rate-sensitive sectors such as real estate and utilities are particularly vulnerable, so if choosing corporate bonds, it’s better to focus on companies with stronger balance sheets.
This article was written by IL Contributors at investinglive.com.