Morgan Stanley: Earnings Expectations Rising Faster Than Interest Rates
nashnova research
U.S. 10-year Treasury yields climbed roughly 100 basis points this year, yet global equities rose about 13% over the same period — Morgan Stanley says earnings-growth expectations are outpacing rates, keeping stocks afloat.
Rates are up — why haven't stocks fallen?
Morgan Stanley's head of fixed-income research, Andrew Sheets, frames it with the Gordon Growth Model — a formula that prices a stock as its expected dividend divided by the gap between the required return and the growth rate (r − g).
This means → rising rates (r) should weigh on valuations, but if earnings-growth expectations (g) rise just as fast or faster, the r − g gap barely moves, and valuations hold.
In plain terms = rates are a headwind, earnings are a tailwind; this year the tailwind is stronger, so stocks keep climbing.
How strong are global earnings, exactly?
U.S.: Morgan Stanley expects median S&P 500 EPS growth in the mid-teens percent range, with revision breadth approaching this cycle's highs again.
Europe: the strongest earnings season in years — 2026 EPS growth near 20%, median stock earnings growth above 10%.
Asia & EM: last quarter's net beat ratio hit 21 percentage points; net forward-EPS upgrades reached 11 percentage points.
This means → all three major regions are accelerating at once — this is what keeps the equity risk premium stable.
Is money actually leaving stocks for bonds?
In theory, higher bond yields should pull capital away from equities. But Morgan Stanley finds ETF flows are positive for both stocks and bonds.
In plain terms = investors are not shifting from one to the other — they are buying both. That is the opposite of the negative correlation you would see in a large-scale reallocation.
On the corporate side: U.S. investment-grade bond issuance hit $1.6 trillion through August, up 30% year-on-year; hyperscale cloud providers alone have issued over $220 billion in bonds.
This reflects a clear preference: for large tech companies trading above 20× earnings, debt funding is still cheaper than equity funding. Morgan Stanley expects net corporate-bond supply to hit a record in 2026.
Why hasn't the rate drag fully hit yet?
Sheets cites data going back to 1998: the stock-bond yield gap explains only about 10% of the variance in stocks' relative return over the next 12 months. Stretch the window to three years, and that rises to roughly 50%.
This means → rate moves are a slow-acting force on valuations — it takes sustained, large moves lasting six to twelve months or more to produce a clear valuation impact.
In plain terms = higher rates do not mean stocks fall right away. But if rates stay elevated and earnings growth starts to slow, the drag will build — that race is the key variable ahead.
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