The Cost of Capital Is Rising. Did Stocks Get the Memo?
Interest rate hikes are not traditionally welcomed by risk assets. Since 1972, the broad market has historically fallen about 4% in the six weeks following the first increase of a hiking cycle, as investors factor in higher borrowing costs and discount rates. While stocks frequently sell off in the opening stages, median returns over the subsequent six months have historically been positive. Ultimately, investors care less about the direction of policy rates and more about why those rates are rising.
If tighter monetary policy reflects stronger economic growth, resilient demand and healthy corporate earnings, the market can withstand higher bond yields. This time around, after a widely anticipated 25 basis point hike at the September FOMC meeting, stocks have remained relatively resilient – perhaps because this is not a typical cycle driven solely by inflation or labor market concerns, but because the Fed’s policy path is only one factor shaping the rate environment.
Now add in roughly $315 billion of expected bond issuance from the hyperscalers in 2027 (on top of $280 billion in 2026), ongoing conflict in the Middle East and its effects on energy prices, and a booming equity market. The Fed may have initiated the move higher, but it is no longer acting alone.
Not just the Fed
The most consequential move may be the relentless rise in real yields – the true cost of capital. Several forces are pushing to the front:
• A resilient economy. Activity has been surprisingly difficult to slow, and consumers are still spending.
• Extraordinary demand for capital. AI infrastructure, data centers, semiconductors and power generation are absorbing vast investment, paving the way for longer-term productivity.
• Competing for funds. Heavy government debt issuance puts Treasury supply in direct competition with private-sector demand.
• Rising energy prices. Middle East conflict and elevated commodities have investors demanding more compensation for longer-duration assets.
A bigger buffer
An over 70 basis point rise in real yields should, in theory, pressure equities as borrowing grows more expensive. Yet stocks have stayed resilient, thanks to corporate earnings, stronger growth and AI-related spending. Margins at 17% mark an all-time high. Fittingly, the equity risk premium is roughly where it began the year – bonds are no more attractive than stocks despite higher real yields.
History suggests stocks can withstand higher rates when those rates reflect stronger growth and healthier profits. For now, earnings are winning the battle, but real yields remain in the driver’s seat.
Rick Barragan is the Managing Director,
Los Angeles Market Manager, for
J.P. Morgan Private Bank.
[email protected] | (310) 860-3658
privatebank.jpmorgan.com/los-angeles
Source: “The cost of capital is rising. Did stocks get the memo?” Kriti Gupta, executive director, global investment strategist, Nick Roberts, portfolio manager, specialized strategies, Sept. 18, 2026
