What History Suggests About Rates, Growth and Market Returns: Insights from Denise Chisholm - September 24, 2026

Where the 10-year Treasury really sits

Rising bond yields are often viewed as a warning sign for markets. Denise sees a more nuanced picture. Looking at the historical relationship between nominal economic growth and interest rates, she noted that the 10-year Treasury yield would be roughly 100 basis points higher based on past patterns, while the policy rate would be about 75 to 90 basis points higher. Even after the recent increase in yields, she argues that rates remain low relative to history. That context matters when considering what the Federal Reserve might do next. Historically, the lower policy rates have been relative to nominal growth, the more likely the Fed has been to continue hiking, she said. At the same time, market returns and the odds of market gains have been remarkably similar across most historical environments. The exceptions have tended to occur only in more extreme circumstances. She also pointed out that rate increases of less than 125 basis points in a given year have historically been associated with some of the strongest equity market outcomes.

Why weak income growth matters

While inflation remains elevated, Denise does not view it as the dominant issue. She noted that the personal consumption expenditures deflator, the Fed's preferred inflation measure, sits just above 3.7%, placing it in the 38th percentile of historical observations dating back to the 1960s. Income growth tells a different story. Real income growth has been negative, a rare occurrence outside a recession. Nominal income growth sits in the 13th percentile of historical observations and is approximately 40% below its long-term median. At first glance, that backdrop may appear challenging. The Fed is raising rates while consumers are already facing pressure. However, historical data has often pointed to a different outcome, she argued. Looking at prior hiking cycles since 1962, periods of below-average wage growth have historically been associated with stronger market returns than periods of above-average wage growth. Her explanation is that limited wage growth reduces the likelihood of inflation accelerating significantly, which may lessen the amount of policy tightening required. Historically, more modest hiking cycles have generally been easier for markets to absorb.

Higher rates as a reflection of growth

The conventional view is that higher interest rates slow consumer spending and business investment, eventually weighing on economic growth. Denise acknowledged that logic but noted that the historical data often tells a more complicated story. When she compares real interest rates with real economic growth, she sees a persistent positive relationship. Historically, higher real rates have more often been associated with stronger GDP growth over the following year. In her view, that suggests the Fed has more often followed economic cycles rather than created them. As a result, fears that rising rates automatically lead to a downturn have historically been less common than many investors assume.

What a modest hiking cycle looks like

Denise defines a hiking cycle as one involving at least 75 basis points of rate increases. Under that definition, two or three additional hikes could still qualify as a hiking cycle if they move rates closer to historical equilibrium levels. She also drew a distinction between modest hikes and the more aggressive tightening periods that have historically occurred during boom-like economic conditions. While recessions have often started around periods when rates were rising, not every hiking cycle has ended in recession. Historical data suggests more challenging outcomes have tended to occur when rates are raised aggressively amid boom conditions. By contrast, weaker income growth may allow economic expansion to continue longer without creating the type of overheating that has historically preceded more significant slowdowns.

Technology and the CapEx question

Questions remain about whether higher yields could undermine investment related to artificial intelligence. Denise offered a different perspective. She noted that capital spending is already slowing and suggested investors remain open-minded about how the investment cycle may evolve from here. According to her analysis, technological innovation often makes scarce and expensive resources more affordable and widely available. As a result, some companies may be able to borrow less while continuing to grow. If that occurs, it could support stronger free cash flow than some investors currently anticipate. She also highlighted what she views as a historically unusual valuation backdrop for technology stocks. Technology sector multiples have experienced roughly 30% compression over the past year, placing them in the bottom 5% of historical observations since the 1990s. Periods of significant multiple contraction have often been followed by stronger relative performance for the sector, according to her analysis. While acknowledging concerns about earnings growth, she argued that much of that uncertainty may already be reflected in valuations, creating what she views as an attractive risk-reward profile.

Where the U.S. and other regions stand

Moving beyond sector leadership, Denise remains cautious about the argument that Europe and Japan are entering a meaningfully different growth cycle from the United States. In her view, the expected earnings acceleration has not yet appeared in the data. She noted that neither region has meaningfully outgrown comparable U.S. companies from an earnings perspective, even outside the technology sector. She also pointed to higher oil prices as a potential headwind for overseas markets. In her assessment, elevated energy costs may be easier for the U.S. economy to absorb than for some international markets. Without stronger earnings growth, she argued that the recent valuation expansion in certain overseas markets could resemble what has historically been considered a value trap rather than a lasting shift in leadership. Based on that analysis, she believes the U.S. is likely to continue leading global markets on a relative basis.

Where the other sectors fit

Financials typically face challenges when the yield curve flattens, which has often occurred during Fed hiking cycles. Denise noted that financial stocks have historically tended to underperform in those environments. However, she also observed that the sector's relatively inexpensive valuations may help limit downside risk. Consumer discretionary occupies what she described as a "muddy middle." Some rate-sensitive areas, including homebuilders, already trade at historically inexpensive valuations, suggesting that some of the concern around higher rates may already be reflected in prices. Among major sectors, she expressed the greatest caution toward defensive areas such as utilities, consumer staples and, to a lesser extent, health care.

Conclusion: Looking beyond the headlines