Fidelity: Rising Rates Will Hit Stocks If Earnings Don't Compensate

Jurrien Timmer, Director of Global Macro at Fidelity Investments, warns that rising interest rates could harm stock valuations if earnings growth does not offset it. According to Fidelity, the spread on junk bonds—the yield premium over Treasuries—is 3.37 percentage points compared to a low of 2.67. If the spread continues to widen, it will impact both stocks and high-yield bondholders.

Timmer's Argument

Timmer published a chart comparing valuation models with and without interest rates. "The point of the chart is to show how destructive rising rates can be if not offset by rising earnings," he wrote on X. In 1987, 2000, and 2021, the three-variable model could not explain P/E; today, he says, the situation is different as long as margins and spreads hold. In a separate post last week, Timmer explained the rise in yields by sticky inflation and fiscal risk. The yield on 10-year Treasuries on October 29 returned above 5%—to 5.05%.

Valuations

In a September note from Fidelity, the forward P/E was around 19 with expected earnings growth of about 20%. According to Timmer, a yield of around 6%—a possibility, not a forecast—could mean a P/E closer to 16.

Credit Market

A Fidelity chart shows that the Barclays high-yield bond index peaked in September—a month before the S&P 500 total return index peaked. Historically, the years 2014–2016 are marked as a "stealth bear market": the spread rose from 3.29 to 8.20. Meanwhile, the ICE BofA spread fell to 3.18 on October 27 from 3.40 on October 22. Global corporate spreads reached their highest since May 2025 on October 23, according to the Bloomberg index, due to concerns about debt financing for AI spending.

Conclusion

As long as margins and spreads hold, Timmer's model does not indicate a bubble. If spreads begin to widen again along with rising yields, pressure on stock valuations and junk bond prices could increase simultaneously.