What rising rates mean for stocks, bonds and diversification: Insights from Jurrien Timmer - September 14, 2026

A global rate story, not just a U.S. one

Rising long-term yields are not solely a U.S. phenomenon. Bond yields in Canada, the U.K., Germany and Japan have all reached new cycle highs after climbing steadily since 2021, with China and Switzerland remaining notable exceptions. Jurrien described the trend as a "crowding-out" story. Demand for debt is increasing globally from both governments and corporations while central banks have resumed raising rates. At the same time, inflation remains above central bank targets, oil prices remain elevated and geopolitical tensions continue to contribute to inflationary pressures. In that environment, he reiterated a view he has expressed before: yields above 4.5% can become increasingly challenging for markets. In his framework, the range between 4.5% and 5% is a cautionary zone, while yields above 5% warrant closer attention.

Why the Fed may need to reverse course

The changing rate backdrop has also implications for monetary policy. According to Jurrien, the Federal Reserve's rate cuts last year now appear premature. At the time, concerns about a weakening labour market and moderating inflation supported the decision. Since then, job growth has remained resilient while inflation has moved higher. As a result, he suggested the next step may not represent a new tightening cycle but rather a reversal of the cuts implemented last year. He also noted that a less predictable approach from the Fed could have consequences for bond markets. If investors have less clarity about future policy decisions, they may demand a higher term premium for holding longer-term bonds. That, in turn, could place additional upward pressure on long-term yields.

Booming earnings, falling valuations

While yields have moved higher, corporate earnings have remained exceptionally strong. Trailing earnings growth has been running near 30%, while forward earnings estimates have approached 40%, with S&P 500 earnings-per-share estimates around $400. Even with that earnings strength, valuations have moved lower. The market's price-to-earnings ratio has fallen roughly 9% year over year. One reason, Jurrien suggested, is that investors may be reluctant to pay peak valuations for earnings growth that could eventually slow, even if earnings themselves continue to rise. Higher borrowing costs may also be weighing on valuations. As the cost of capital increases, valuation models typically assign lower values to future cash flows, creating a headwind for equities and other rate-sensitive assets. Even so, strong earnings growth may help offset some of that pressure.

Reading the shift in the AI trade

That tension between strong earnings growth and rising capital costs is also evident across the artificial intelligence ecosystem. While AI remains a major market theme, areas ranging from memory and semiconductors to data centres have been in a correction since early June. Hyperscaler stocks have also been largely unchanged over the past year despite continued earnings growth. Investors, Jurrien suggested, are becoming increasingly focused on capital spending requirements and the potential return on those investments. Many large technology companies are dedicating a growing share of cash flow to AI-related capital expenditures rather than share repurchases, raising questions about the timing and scale of future returns. He also highlighted a broader shift in corporate financing. Borrowing through the corporate bond market has increased significantly while equity issuance has moved higher, reversing a long period in which buybacks dominated capital allocation decisions. When commentary from firms such as Anthropic and OpenAI points to slowing the pace of frontier-model development, one interpretation, he said, is that investors are becoming less willing to fund the enormous sums required, particularly as lower-cost competing models emerge. He noted that this view is speculative.

A broadening market strengthens the diversification case

Even as some AI-related market leaders have stalled, the broader market has remained resilient. The S&P 500 has stayed close to its highs even as leadership has expanded beyond the largest technology companies. Jurrien pointed to growing shareholder payouts, including dividends and share buybacks, across value stocks, financials, international developed markets and the equal-weighted S&P 500. Growth in payouts among these groups has become more comparable to that of the MAG7 than it was in previous years. The shift suggests investors now have more options than they did several years ago, when market performance was far more dependent on a small group of mega-cap technology stocks. Diversification opportunities extend beyond sectors to geographic regions. From a geographic perspective, Jurrien expressed a preference for international developed markets over emerging markets. He highlighted European banks for their strong payout growth and attractive yields. He also pointed to Canada's mix of financials, energy and gold exposure as appealing in the current environment. Emerging markets remain attractive in certain areas, he noted, but their increasingly bifurcated nature means passive exposure can often result in significant concentration in AI-related themes rather than providing broad diversification.

Gold, commodities and store-of-value assets

Beyond equities, Jurrien highlighted commodities and other store-of-value assets as potential sources of diversification. He noted that commodities are reaching new highs, with roughly 80% of the Bloomberg Commodity Spot Index in an uptrend. He described commodities as among the least correlated asset classes relative to stocks and bonds, making them a potential diversification tool. He also discussed the possibility of a future environment in which fiscal and monetary authorities work together to limit the rise in borrowing costs. In that scenario, gold could play a prominent role, supported by ongoing demand from Asian central banks and renewed ETF inflows. Based on global liquidity measures, Jurrien said he could see gold moving toward $5,000. He also suggested Bitcoin could be positioned similarly as a store-of-value asset following its recent cycle.

A lower-beta market environment