Goldman Sachs: Rising Rates Won't End the Bull Market — Earnings Growth Is the Core Driver
nashnova research
Goldman Sachs said in a September 11 report that 30-year Treasury yields at 5.3% are a headwind but not a death sentence for the bull market — as long as earnings growth delivers and corporate balance sheets stay healthy, equities' relative value remains intact.
Rates are this high — why does Goldman still say the bull market is alive?
The spread between the S&P 500 earnings yield (5.2%) and the real 10-year Treasury yield (2.6%) sits at 270 basis points, stable over the past two years. This means → rates have compressed absolute valuations, but stocks' "value-for-money" versus bonds hasn't deteriorated.
Goldman's dividend discount model implies an equity risk premium — the extra return investors demand for holding stocks over bonds — of roughly 3%, also flat. In plain terms = the market hasn't soured on stocks just because rates are high; the price investors charge for equity risk hasn't moved.
The forward P/E has dropped from 22x at the start of the year to 19x, but Goldman argues valuation compression ≠ end of bull market. The real test is whether earnings can catch the baton.
What does history say about stocks after rate hikes begin?
Goldman reviewed seven rate-hike cycles over the past several decades: in the first three months, the S&P 500 averaged -2%, with only a 29% chance of a positive return.
Extend to 12 months, and the average return hits +9% — positive every time except 2022. This means → early-cycle pain is the norm, but markets typically digest the shock within a year.
Rate markets have already priced in more than three 25-bp hikes through mid-2027. This reflects a lower risk of a hawkish surprise catching the market off guard.
Beyond the level of rates, what hidden risk matters?
Goldman flagged a distinct risk: rate volatility itself, not just how high rates are.
Historical data show that when rate moves exceed two standard deviations, equities typically struggle to absorb them. Today that threshold equals roughly 40–50 bp of upward movement in the 10-year yield within a single month.
In plain terms = the market can handle rates grinding higher slowly; a 50-bp spike in one month breaks things. The recent pace of the move is a key reason stocks have been under pressure.
Can companies withstand high rates?
The S&P 500's aggregate interest coverage ratio stands at the 99th percentile of the past 20 years; the median stock sits at the 68th percentile. This means → large-cap debt-servicing capacity is at historical highs — most debt is fixed-rate and long-dated, so actual borrowing costs have barely risen.
Small- and mid-cap companies are more vulnerable: their balance sheets carry a higher share of floating-rate debt and are more sensitive to rate increases. In plain terms = big companies wear armor, small ones wear dress shirts — same rate storm, very different exposure.
Goldman estimates that a 1-percentage-point rise in the cost of equity requires companies to lift their long-term growth outlook by 2 percentage points to fully offset the valuation hit — a pressure that is forcing companies to find new growth levers.
How are companies responding to rate pressure?
Roughly half of S&P 500 companies discussed using AI to boost productivity during this quarter's earnings calls.
U.S. announced M&A volume has reached $1.4 trillion year-to-date; global deal volume is up 36% year-over-year. This reflects companies "buying growth" to offset the rate drag.
Rate pressure may also push more firms to divest low-growth or non-core units, concentrating resources on higher-growth trajectories.
What is Goldman's outlook, and what does it recommend?
Goldman forecasts S&P 500 EPS of $340 in 2026 (+24% YoY) and $385 in 2027 (+13% YoY).
The firm recommends avoiding homebuilders sensitive to long-end rates, and favoring financials and high-growth names.
This means → Goldman's core thesis is that "earnings growth can outrun the rate headwind." Whether that thesis holds will be tested by whether earnings keep delivering over the next few quarters.
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