Why High Rates Will Not Sink Stocks

VIEW IN BROWSER

By Lucas Downey, Editor, TradeSmith Alpha Signals

You hear it everywhere you turn…

Rising rates are terrible for stocks.

The latest media deluge is pushing a narrative that long-end rates are out of control.

Just this week, the U.S. 30-year Treasury yield approached 5%… a level that pundits call a “line in the sand” moment.

But is it?

Now, I can’t argue that interest rates are elevated. But should the alarm bells be ringing this loudly?

Is the media right on this one? Do we NEED to worry about long-term Treasury rates right now?

Only time will tell how this plays out. But that doesn’t mean we’re helpless.

With TradeSmith’s vast treasure trove of data – and testing methods – we can stroll through history for clues about what this unique situation means.

And today we’ll do just that. Not only will we unpack a brand-new signal study on the 30-year yield, but we’ll also take a stab at the 10-year yield.

Odds are, the findings will surprise you…

And to arm you with an action plan, I’ll offer up one little-known stock that history shows could surge 11% in the coming months…

Recommended Link

BREAKING: Senate Bill 394 Authorizes New U.S. Dollar

On July 18th, Trump approved a new digital U.S. dollar that’s already used for $27 trillion in payments a year – more than Visa and Mastercard combined. It’s not Bitcoin or a Federal Reserve scheme, but a free-market solution to restore the dollar’s supremacy. See Louis Navellier’s new analysis of Trump’s 21st-century dollar.

Should Investors Worry About High Yields?

In the next few weeks, you’ll hear non-stop chatter about interest rates as the Fed is slated to restart rate cuts in September. This is arguably the biggest macro moment of 2025 outside of Liberation Day, and we want to make sure you’re prepared.

We’ve been on record about why cuts in the Fed’s short-term interest rate, absent a recession, are ultra bullish for stocks.

But today we’ll be discussing the other side of the coin…

While short end rates like the 2Y yield have been in decline, long end rates have been stubbornly elevated.

Here you can see that the U.S. 30-year yield traded just under 5% last week:

Now I’m sure you’ve heard that lower rates at the long end are good for stocks… and they are.

After all, interest rates affect major items including borrowing costs, capital investment, and more. No doubt, lower rates are a good friend to investors as easier access to capital spurs confidence.

But should we assume that high long-term rates are inherently bad for equities?

Let’s review the history of how the S&P 500 has fared during different 30Y yield levels.

I went back to 1978 pulling weekly data on the U.S. 30-year yield and plotted forward stock market returns from each week.

I bucketed the returns by three long-end rate environments:

3% or below
Between 3% and 5%
5% and above

I chose these levels because of how they describe recent eras in market history.

3% and below describes the post Great Financial Crisis era through COVID-era. 3%-5% captures most data points including the late 1990s, early 2000s, the GFC, and the post-COVID high rates of 2022 through today. 5%+ includes the 1980s, 1990s, and early 2000s. All together, each of these ranges includes various macro situations.

If you believe lower rates are better for equities, you are correct! The average 12-month return for the S&P 500 when 30Y yields are below 3% is +11.8%.

This compares to 12-month gains of +9% when the long-end rates are sandwiched between 3% and 5%.

But most surprising is that whenever long end rates are above 5%, the S&P 500 still sports a 12-month forward return of +10.7%:

Let’s now do a similar study with the more popular U.S. 10Y yield. It’s recently fallen to 4.1%, the lowest reading since April:

Like the prior study, there isn’t much long-run correlation between where rates are and how stocks behave afterwards.

Check this out.

I pulled monthly data on the U.S. 10Y yield going back to 1986. I used this start date so that we can compare returns not only to the S&P 500, but also the NASDAQ 100.

I bucketed interest rates like this:

2.5% and below
Between 2.5% – 5%
Above 5%

When the 10-year yield is below 2.5%, the S&P 500 gains an average of 12.4% in the following 12 months.

When yields are between 2.5% and 5%, stocks jump an average of 8% in the following 12 months.

Possibly most surprising: Yields above 5% has amounted to 12-month forward returns of 10.5%:

Bottom Line: Stocks almost always move higher, regardless of the rate environment. Even on shorter-term timeframes, there is not a single instance of the stock market falling because of where rates are at any particular time.

So stop fearing high rates… and focus more on the stocks you own.

Keep these studies handy when the next rate scare hits!

Now, let’s isolate one company primed to soar in the coming months…

Trane Technologies (TT) Enters Strong Seasonal Period

Given markets are at all-time highs and we’re partway through the summertime blues of September, let’s focus on an under-the-radar opportunity in HVAC player Trane Technologies (TT).

This is a stock I spoke about back in May as the S&P 500 made an eight-day thrust signal.

Trane is a $91B market cap company where 2024 revenues reached nearly $20 billion with operating income of $3.5 billion. Earnings per share came in at $11.22 last year.

Said simply, this is a high-quality company.

And the shares have recently slipped 12.5% from highs to $412:

But with history as a guide, we can be confident that TT’s next move is up.

TradeSmith’s Seasonality tool put this idea on my radar.TT has a Seasonal Synergy setup running from Sept. 4 through Dec. 3.

Looking back 15 years, the stock jumped an average of 11% in this window. And since TT started the window below a key RSI level, unique to its historical volatility, it qualifies for this rare strategy:

Further, the hit rate is 100% with all returns listed below. In the past three years, even in 2022, the stock has returned anywhere from 14%-19% in just three months.

That’s a lot of green:

Trane looks ready to leave the station! But one last checkup is needed to seal the deal for me.

Jason Bodner’s Quantum Score instantly ranks a stock by fundamental and technical attributes with a quantitative method. Altogether, TT comes in at a decent 69.2.

Notably, the fundamental score of 90 is super healthy. The only penalty is the technical rank of 54.5. Off to the right you can see the technical rank (blue) has fallen dramatically with the recent selloff.

To wrap up, interest rates continue to be top of conversation in the media… especially long-dated yields.

But don’t get so scared by the narrative that you miss the opportunity ahead. History proves stocks can and have performed well regardless of the interest rate environment.

Instead, use your energy to spot oversold stocks with healthy fundamental attributes.

Why High Rates Will Not Sink Stocks