What History Says About Higher Rates and Equity Returns: Insights from Denise Chisholm - October 22, 2026
Treasury yields have climbed back above 5%, reviving a familiar concern among investors: do higher rates inevitably lead to weaker stock market returns and a greater risk of recession? The historical relationship, however, is more nuanced than many assume. According to Denise Chisholm, Director of Quantitative Market Strategy at Fidelity, the data suggests investors may be focusing on the wrong variable. Drawing on decades of market history, she explored what the evidence says about rates, recessions, corporate spending, inflation and defensive positioning, highlighting why context often matters more than headline numbers.
Here are some of the key themes from her commentary.
The real driver of equity risk is recession, not rates
Many investors are familiar with the chart that groups stock market returns by interest-rate levels and shows the post-5% bucket as the only one where equities have declined on average. While the chart is accurate, Denise noted that the conclusion becomes less persuasive when viewed in a broader historical context. Change the time horizon or extend the analysis back to 1953, and the apparent relationship begins to fade. Some periods with rates higher than today's levels delivered equity returns above 5%. A more useful way to view the data is through the lens of what statisticians call a confounding variable. When recession periods, which occur roughly 20% to 25% of the time, are removed from the analysis, average equity returns across different interest-rate environments become remarkably similar. That suggests recessions, rather than rates themselves, have historically been the primary headwind for equities. Higher rates have also not reliably translated into higher recession risk. Historical experience shows periods of elevated rates have often coincided with economic expansion, while some lower-rate periods have experienced a greater incidence of recession. For that reason, Denise argued that reducing equity exposure solely because rates have moved above a particular threshold may create a risky setup for investors
Bonds, yields and the growth call
Questions about bonds naturally follow when Treasury yields are near 5%. Some investors may wonder why they should own equities rather than bonds in that environment. The answer, Denise suggested, comes down largely to earnings growth. Even if earnings growth slows meaningfully from recent levels, history suggests equities have often remained attractive relative to bonds when growth stays in double digits. Looking at past Federal Reserve hiking cycles, she noted that the long end of the Treasury curve has tended to rise about 80% of the time when the Fed continues raising rates. Higher long-term yields can offset part of a bond's coupon return through capital losses. In the remaining cases, long-term yields have generally stayed relatively stable, sometimes because markets gained confidence in the central bank's inflation-fighting credibility and sometimes because of structural influences such as foreign demand for Treasuries. She added that she would not be surprised if the long end remains relatively steady even if further rate hikes occur. That could create a more balanced risk-reward profile for bonds than investors have experienced in recent years. Still, if double-digit earnings growth persists, equities may continue to hold an advantage over bonds.
A more nuanced read on debt
The discussion then broadened to debt and how it should be evaluated. Debt is rarely about a single statistic. Denise emphasized the importance of separating government debt from corporate, consumer and financial-sector debt while also considering who owns the debt and how quickly the economy is growing. She pointed to France as an example of a more challenging backdrop, where slow growth, elevated government debt, significant reliance on public spending and higher private-sector debt combine to create greater pressure on the economy. The U.S. picture looks different. Consumer, corporate and financial-sector debt have deleveraged substantially since the global financial crisis, while government debt has risen. Looking at total debt across the economy, the increase in government borrowing has largely offset reductions elsewhere, making the overall debt picture appear more like a debt swap than a broad-based buildup. Combined with real economic growth that remains above 2%, she noted that parts of the economy appear to have capacity to re-lever if conditions permit.
Where defensive sectors stand
The debate around recession risk ultimately feeds into another key question: whether investors should be positioning more defensively. A modest rotation into defensive sectors, including utilities, consumer staples and health care, has emerged in recent weeks. Historically, these sectors have tended to outperform significantly when a recession arrives within the following 12 months. That history helps explain why investors often gravitate toward defensive areas during periods of heightened uncertainty. At the same time, these sectors have generated many more recession signals than the number of recessions that actually occurred. Valuation remains an important consideration. Despite underperforming the broader market for roughly four years, these sectors have become more expensive relative to their earnings because profit growth has lagged even further. Denise noted that this dynamic can resemble a value trap. In her assessment, defensive sectors are not currently pricing in a recession and do not appear particularly cheap. Historically, that has limited their ability to generate excess returns over the following year absent a significant deterioration in economic conditions.
An inflation outlook that has not materially changed
The discussion concluded with inflation, an area where her broader outlook remains largely unchanged. Inflation remains elevated and continues to outpace nominal wage growth, leaving the average consumer with negative real income growth. Historically, Denise noted, that dynamic has tended to limit inflation's ability to accelerate significantly because consumers ultimately have less purchasing power available to absorb higher prices. She also highlighted the importance of looking beneath headline inflation measures. Excluding shelter costs from core CPI, the latest inflation reading changed only modestly, rising from roughly 1.9% to just under 2% year over year. As a result, she does not currently view the next cycle as primarily an inflation problem. Even after the latest CPI release, the underlying data had not materially changed her outlook.
Conclusion: looking beyond rate levels
Taken together, the analysis points to a common theme: rate levels alone are a weak basis for reducing equity exposure. Recession risk was the variable Denise emphasized most when evaluating equity markets, while rate levels alone were not presented as a sufficient reason to reduce exposure. Historically, slowing CapEx from elevated levels has often coincided with stronger activity elsewhere in the economy. U.S. debt appears more like a debt swap than a debt crisis. Defensive sectors, meanwhile, remain fully valued rather than cheap. For investors, the key questions ahead may be whether growth slows enough to justify a more defensive stance and whether long-term yields ultimately stabilize in the face of a changing rate environment.