Nick Colas, co-founder of DataTrek Research, pushed back against a common market myth in his Wednesday client note: rising long-term interest rates do not automatically spell trouble for stocks. using historical data and discounted cash flow (DCF) analysis, Colas argued that earnings growth can more than offset the drag from higher yields, making the relationship far more nuanced than many skeptics assume.

The 2015-2019 data that challenges conventional wisdom

Colas pointed to the period from 2015 to 2019, when the 10-year U.S. treasury note yielded an average of 2.27%. During that stretch, the S&P 500's forward price-to-earnings (P/E) ratio ranged between 15x and 18x earnings, according to DataTrek Research. Today, the 10-year yield stands at 4.49%, yet the forward P/E has actually risen to about 21x earnings. This direct historical comparison contradicts the intuitive notion that higher yields must compress valuations, illustrating that other factors — notably earnings growth — can shift the equation.

Why a 2-point rate rise plus a 3-point EPS growth can boost valuations

Colas also broke down the math behind DCF models. theoretically, an increase in interest rates is negative for valuations only if earnings growth expectations remain static. but in practice, he explained, earnings growth often adjussts upward alongside rising rates. If interest rates rise by 2 percentage points (as they have since 2020) while earnings growth expectations increase by 3 percent, equity valuations can actually rise. Colas emphasized that adjusting one variable while holding all others constant — a common error among short-sighted market commentators — ignores how real-world economies evolve.

An echo of the 2013 'taper tantrum'? How markets defied panic then

The current debate echoes the 2013 “taper tantrum,” when the Federal Reserve’s signal of tapering bond purchases sent 10-year yields soaring from about 1.6% to nearly 3%. Many predicted a stock market rout, but the S&P 500 rose roughly 30% over the following year as earnings growth picked up. As DataTrek’s analysis suggests, context matters: the same yield move can have opposite effects depending on the accompanying earnings trajectory. Investors who sold in panic during 2013 missed a significant rally .

The one variable that could reverse the math

Colas’s model hinges on the assumption that earnings growth expectations rise in step with or faster than interest rates. An open question remains: what if earnings growth disappoints? If the economy slows and corporate profits fail to keep pace, the DCF math flips — higher rates then do compress valuations. The source does not address the risk of a stagflation-like scenario where rates stay high while earnings stall. That gap leaves investors with a crucial unknown: how much earnings momentum is already priced in, and what could break it?

According to DataTrek Research, Colas’s note reminds investors that markets are intricate systems that defy single-variable predictions. As he put it, “adjusting one variable in a complex formula while holding all others constant” is a mistake. The report says the interaction of rate moves, earnings , inflation, and other factors makes each market environment unique. Readers should weigh Colas’s historical evidence but also remain vigilant about earnings revisions ahead.