Interest Rates: A Headwind, not a Roadblock to Growth Stocks

Introduction

So here we are again, interest rates are rising and many are issuing dire warnings for you and your money…so you are probably asking

Can my stocks—especially growth stocks that have led this rally—keep moving higher? Here’s the key insight our team wants to stress again,
Revenue growth, earnings, earnings growth, and earnings revisions and not interest rate are currently driving this stock market.

1. Earnings Are Overpowering Rates

At this filming, the revenue growth rate for the S&P 500 for Q1 is 11.4%. On December 31, the estimated revenue growth rate for Q1 was 8.2%. On March 31, the estimated revenue growth rate for Q1 was 9.9%. Clearly, overall, the 1q26 was stronger than analysts first thought.

As of FactSet’s last data update, Q1 2026 earnings growth: +27.7% (highest since 2021). 84% of companies beat EPS estimates, Margins at record highs (14.7%) with
10 of 11 sectors showing growth led by technology and energy with 2026 EPS set for about $335/s and 2027 at around $385/s and trending higher fast.

**Bottom Line: For the overall SP500, Revenue, Earnings and Earnings growth is accelerating faster than interest rates are rising offsetting some compressing valuations and PE multiples.  Another Factset chart showing that we are currently trading at around a 21-21.5x Forward PE on the S&P 500, middle of the 5 year range even though EPS are hitting material new ATH’s and interest rates are at new yield highs not seen in 15 years.

2. Understanding Interest Rates

Remember that there are 2 components to those nominal interest rate yields that are constantly discussed on TV. The nominal yield equals the sum of the markets Real interest Rates + Inflation Expectations.

While many in the financial news are discussing the notion that the rise in yields is being driven by rising inflation expectations, the real-time market data is saying quite the opposite. Here’s the rise in nominal yields the last 2 months.

And here’s the recent rise in 10-year real interest rates.

Here’s a similar graphic from Alpine Macro showing year rates are driving the rise in rates here in the US, not currently inflation expectations.

While here is the recent DECLINE, yes decline in 2-year inflation BE’s.

It’s down and to the right since oil peaked the last week in March. We can argue and discuss I’ve mismatched maturities for this example, but I did it to show the fast twitch nature of even bond components to Realtime data.  Once again, our team is trying to find real time indicators that can help us. We try to stay away from lagging and revised government data. Why is this make up of the bond market good for stock investors right now?

Why are Real Rates Rising? Most likely because the economy accelerated post its 1q slowdown. One can see this in the up-trending Eco Surprise index the last 6 weeks. Rising from around 5 to now close to 50.

This strength in the economy has led to a return to strength in growth stocks over value and industries in the Technology and industrial and financial transaction industries outperforming value-based sectors in healthcare, utilities, materials and staples.

88% of companies that have reported maintained or raised guidance even with the turmoil in the middle east and rising energy prices.

3. Since many in the financial press have been declaring bubbles for a year or so more, I return to you the bubble we have compared this to between 1997-1q2000, Dot com.

Then vs Now: Interest Rates

**Specifically, during the post LTCM Oct 1998-1q2000: the period we’ve discussed for 14 months the 10-year interest rate went from 4.5% to 6.75%.  And in the last 6 months of the Dotcom bubble, the interest rate rose almost 100bps.

**Today, 2q2025 post Tariff Tuesday last year the 10-year interest rate has risen from? 3.88% to 4.65%. And more importantly, rates have risen only about 45bps since the stock market lows at peak Iran concerns at the end of 1q26.

While it feels bad, today’s move is more measured and less disruptive to stocks.

4. Oil Comparison

Ok on oil prices, I am one of the first to raise concerns about oil prices rising.  If it moves too high too fast, historically that puts a huge headwind for stock markets, and it has marked every major stock market to I have studied.  The Nifty 50 era, the Dotcombomb, and the GFC all had something in common.  They had oil prices rising quickly and dramatically and energy stocks leading the markets higher with the previous bull market leaders right into the ultimate market top.

Looking back at the same period in Dotcom, **1998–2000: Oil rose 150-200%**

**Tarriff Tuesday 2025–Now: Oil started around $58/bl and reached a spike of about 112-120/bl for a few days, Up 100% in about 5 months.  That is hurting consumer confidence and many retail industries.  However, historically, oil would have to rise close to the $150/bbl range or higher to cause permanent and irreparable damage to the US economy.

Today the energy triggered Inflation impulse here in the US is real, just fill up your gas tank, but its manageable for our stock market right now because the US energy intensity is much less than 30 or 40 years ago and 2. We are much more energy independent now than then having become a net exporter of oil and natural gas.

5. Old school back of the envelope Valuation Framework

In my early days as an equity analyst, many of the older PM’s in Boston had some basic math tricks they liked to use.  The one that stayed with me all these years is the easy valuation/pe rule- those who have watched us know I hate discussions about PE’s, I don’t find them very helpful at valuing equities.  But here’s the basic tool.  Well back before the internet and AI when we were more of an asset-based economy vs. an intelligent economy the old PE rule of thumb was?
**Approximate Fair P/E = 1 ÷ 10-Year Treasury Yield**=

Example:
If 10-year yield = 4.578%→ Fair P/E ≈ 21.85x

Interpretation: being that- Higher interest rates → lower fair P/E
– Lower interest rates → higher fair P/E

Current takeaway: Does this make sense in today’s rate environment and where would this place the SP500 vs. those strategist targets?  Usings the Factset EPS mubers would say fair value now for the SP500 is 21.85x $335 for 2026 and 21.85x $385/s for 2027= $7317 now (as of this writing the SP500 was 7319, pretty crazy ) and 8412 for 2027.  Of course should the 10 year Treasury rise more in yield and the 2027 EPS become too high and end lower than $385 you can quickly get a number that would cap the SP500 near 7800-8000, 20x$385

So, what’s our message, while Market valuation isn’t “cheap”, it’s not extreme when compared to interest rates or earnings growth. **Earnings growth is strong**
Rates are rising from historically low levels but not spiking. Inflation is rising secularly but still contained relative to history and stocks are most investors best defense against price inflation.
Bottom Line: Interest rates are a headwind—but not a roadblock.

As a retiree or pre-retiree, we know it can be difficult to stay patient with your portfolio when financial news is designed to stir emotions. Most often, though, the best approach is to stay focused on what matters most to stocks over time: earnings and earnings growth. Right now, that is what the market is watching most closely.

For now, stay disciplined and stay diversified. And focus on what’s real, not just what’s exciting. Whether your priority is growth, income, or a combination of both, the OHFG team is here to help you plan for your family’s financial future, no matter where you are in your career or retirement journey.