Investor behavior suggests elevated interest rates are no longer the threat to equities they once were.
For much of the past two years, the dominant question hanging over global markets has been whether higher interest rates would eventually force a reckoning for equities. That reckoning has yet to arrive. Instead, investors appear to be adjusting their frameworks, pricing in a world where borrowing costs remain structurally higher but not economically suffocating.
U.S. equities continue to trade near record levels, with the SPDR S&P 500 ETF Trust (SPY) serving as a proxy for investor confidence that earnings growth can coexist with restrictive monetary policy. This marks a notable shift from the post-financial-crisis era, when ultra-low rates were seen as a prerequisite for sustained equity gains.
Part of the explanation lies in corporate adaptation. Large, well-capitalized companies refinanced aggressively during the low-rate years, locking in cheap debt and extending maturities. As a result, higher short-term rates have had a muted impact on balance sheets, particularly for blue-chip firms with strong cash flows. Financial institutions such as JPMorgan Chase (JPM) have even benefited, with net interest income supported by wider spreads.
More broadly, economic resilience has forced a rethink of rate sensitivity. Consumers have remained surprisingly durable, labor markets have cooled without collapsing, and corporate earnings—while uneven—have largely avoided the deep downgrades many feared. In that context, rates are increasingly viewed as a policy tool managing inflation rather than a blunt instrument destined to derail growth.
This does not mean markets are indifferent to monetary policy. Valuations, especially in growth-oriented sectors, are more disciplined than during the zero-rate era. Investors are demanding clearer paths to profitability and more predictable cash generation. That discipline may ultimately prove healthy, reducing the risk of speculative excess even as indices climb.
The risk, however, is complacency. Higher-for-longer rates still carry consequences, particularly for smaller companies, commercial real estate, and highly leveraged sectors. A slowdown that meaningfully dents employment or consumer spending would quickly test today’s confidence. Markets may have adapted to higher rates, but they have not eliminated their bite.
For now, the prevailing message from equities is pragmatic rather than euphoric. Investors are no longer waiting for rate cuts as a prerequisite for participation. Instead, they are betting that stable growth, manageable inflation, and selective earnings strength are enough. That shift in mindset may be one of the most important—and underappreciated—market developments of this cycle.
