The Tug-of-War Between Rates and Earnings: Insights from Jurrien Timmer - September 28, 2026

The math behind the market

In his view, the level of the S&P 500 ultimately reflects the interaction between earnings and valuation multiples. Expected earnings over the next 12 months are running around 20%, while operating margins have continued to rise. Those fundamentals, he noted, are difficult for investors to ignore. At the same time, investors have become less willing to pay higher valuations for those earnings. The forward price-to-earnings (P/E) ratio sits near 19, roughly 19% below its previous highs. He pointed to two factors that may help explain why valuations can decline even as earnings grow. First, investors tend to be cautious about paying higher multiples when earnings growth may be approaching a peak because corporate profits are cyclical. Second, higher risk-free yields have become increasingly competitive with equities. With Treasury yields near 5.2%, investors now have a compelling alternative to stocks, which can place pressure on equity valuations.

Echoes of 2022, but with different earnings dynamics

While conditions today differ from those seen in 2022, some parallels remain. Jurrien said a similar scenario is possible in which earnings continue to rise while valuation multiples move lower. If bond yields were to rise toward 6%, which he stressed was a possibility rather than a prediction, valuation models could imply an S&P 500 multiple closer to 16 times earnings from roughly 19 today. The earnings backdrop, however, looks different. During the 2022 downturn, earnings growth provided only limited support against a sharp decline in valuations. Today, trailing earnings have been growing by roughly 30% year over year. That stronger earnings growth could provide a larger cushion against valuation pressure than was available previously, although he emphasized that the outcome will ultimately depend on how both earnings and interest rates evolve.

Rethinking inflation protection

The discussion also touched on Treasury Inflation-Protected Securities (TIPS) and how investors can think about them in practical terms. He noted that a five-year nominal Treasury yielding about 5% with an inflation break-even rate near 2.3% implies a real return of roughly 2.6% if held to maturity. A five-year TIPS security offers a similar real yield. Under that framework, the relative outcome largely depends on where inflation averages over the next five years. The more important question, he argued, is not whether break-even inflation rates accurately forecast future inflation, but whether inflation ultimately runs above or below the level currently priced into the market. Historical comparisons, he noted, show little relationship between break-even rates and the inflation that subsequently occurred. If inflation settles above current break-even levels, TIPS could outperform nominal Treasuries. If inflation falls below those levels, nominal bonds could fare better. He added that inflation averaging meaningfully below current break-even rates may be difficult to envision under current conditions, which is one reason he finds TIPS attractive.

A different approach to diversification

Beyond bonds, Jurrien argued that investors may need to rethink diversification more broadly. The traditional 60-40 portfolio framework relies on bonds and equities moving in opposite directions. In recent years, that relationship has become less reliable. Since the start of the Iran conflict, he noted that bonds and stocks have been positively correlated while oil prices have often moved in the opposite direction. As a result, he continues to favour what he describes as a 60-20-20 framework. Under that approach, 60% remains invested in equities, with a greater emphasis on global diversification. Another 20% is allocated to bonds, potentially including TIPS. The final 20% is reserved for assets that may have lower correlations with both stocks and bonds. Among the examples he highlighted were gold, Bitcoin, commodities, managed futures, leveraged loans and cash. Cash, in particular, currently offers investors optionality because attractive yields are available without taking significant duration risk. Within his own hypothetical allocation framework, he said he has increased Bitcoin's weighting relative to gold because he believes Bitcoin could outperform gold, while emphasizing that this reflects his personal market view rather than a recommendation.

Watching debt sustainability

Another issue on his radar is debt sustainability. He described a simple framework in which debt remains manageable when the cost of borrowing stays below the growth rate of the economy. Recently, real yields have moved above estimates of real potential economic growth. If that trend continues, he said investors may increasingly question whether debt levels remain sustainable over the long term. One possible outcome, if those pressures become more pronounced, could be some form of financial repression, where governments and central banks take measures to influence borrowing costs and the yield curve. He said that possibility is one reason investors may want exposure to real assets such as gold, Bitcoin and commodities as part of a diversified portfolio.

Conclusion: Looking ahead