October 7, 2026

Do stocks fall when interest rates rise? Examining 60 years of data reveals the relationship reverses at a 3% inflation threshold [Extra Edition #2]

Series: “Asset Formation: Aiming to Beat the S&P 500 and All Country World Index! | Asset Allocation Management by a Finance Professional” Extra Edition

I am in my 40s and have been working in the financial industry for over 20 years (holding Securities Analyst and FP certifications). Due to restrictions on trading individual stocks in my line of work, I focus on investment trusts and ETFs to build my asset allocation, aiming for results that outperform index investing.

The conclusion first

Comparing weekly movements of 10-year Treasury yields and the S&P 500 using US data since 1962, the direction of the relationship reverses around an inflation rate (CPI year-on-year) of 3%.
During periods when inflation is below 2%, stocks tend to rise in weeks when interest rates rise (correlation +0.24). During periods of 6% or higher, stocks tend to fall in weeks when interest rates rise (correlation -0.27).
In months when inflation was 3% or higher and interest rates rose by 0.5% or more in a month, the S&P 500 averaged -1.8%, and it only rose in 30% of those months.
The current US inflation rate is 3.7%, and the 10-year Treasury yield is **5.31%**. The interest rate rise over the last year (+1.18%) is almost entirely an increase in real interest rates.
I view the current “inflation over 3%, high interest rates, and high stock prices” not as a contradiction of past trends, but as a state where earnings growth is outpacing the headwind of interest rates. It is not a sell signal, but I am cautious as this is a phase where price movements are likely to be volatile.

1. Why I conducted this comparison

It is often said that “when interest rates rise, stocks fall.” On the other hand, in the 2010s, stocks rose during periods of rising interest rates. I checked 60 years of actual data to see which is correct.

The US 10-year Treasury yield has risen from the 4.1% range to the 5.3% range over the past year. Yet, the S&P 500 continues to rise. I wanted to know what results this combination has produced in the past.

I used the US 10-year Treasury yield (FRB/US Treasury), the S&P 500 (index excluding dividends), and the US Consumer Price Index (CPI).

2. The 3% inflation threshold

I calculated the “correlation” between interest rates and stocks, separated by the inflation rate at that time. Correlation is a value between -1 and +1, where **positive indicates they move in the same direction (stocks rise when rates rise), and negative indicates they move in opposite directions (stocks fall when rates rise)**.
When inflation is low, a rise in interest rates is interpreted as a signal that “the economy is improving.” Therefore, stocks also tend to rise together.
When inflation is high, a rise in interest rates becomes a signal that “the central bank will tighten further to curb prices.” Borrowing costs for companies rise and stocks feel more overvalued, so stocks tend to fall.
In terms of numbers, the correlation is nearly zero at 2-3%, and it turns negative once it exceeds 3%.

3. Stock prices in months when interest rates rose sharply

Next, I categorized months by how much the 10-year Treasury yield moved in a month and averaged the S&P 500’s price movement for those months.
During periods when inflation was below 3%, the S&P 500 averaged +1.4% even in months when interest rates rose by 0.2-0.5%. On the other hand, during periods of 3% or higher, the average was -0.7% for the same magnitude of increase.
For sharp increases of 0.5% or more, the average during periods of 3% or higher was -1.8%, and stocks rose in only 8 out of 27 months (30%).It is clear that a sharp rise in interest rates during a period of high inflation is a bad combination for stocks.
Conversely, during periods when inflation was below 3%, the average for months when interest rates fell by 0.2-0.5% was -1.2%. A decline in interest rates during a period of low inflation can be read as a sign of caution regarding economic deterioration.

4. The relationship has shifted over time

I arranged the correlations for the most recent two years (104 weeks) starting from 1964. The shaded areas are periods where inflation was 3% or higher.

1962-1997 (average inflation rate 4.8%): The correlation averaged -0.27. It was an era where stocks fell when interest rates rose.
1998-2021 (average 2.2%): The correlation averaged +0.30. An era where interest rates and stocks moved together lasted for over 20 years.
Since 2022 (4.4%): The average correlation is -0.15. With the resurgence of inflation, it has returned to an inverse relationship.

The current 104-week correlation is +0.06, which is almost zero, but when narrowed down to the last 52 weeks, it is -0.29, indicating a strengthening inverse relationship.

5. The content of current interest rate hikes

The 10-year Treasury yield can be divided into “real interest rates” and “expected inflation.” The real interest rate is the interest rate minus the rise in prices, measured by the yield on 10-year Treasury Inflation-Protected Securities (TIPS). The expected inflation rate (BEI) is the average inflation rate for the next 10 years expected by the market.
Of the +1.18% rise in the last year, the real interest rate was +1.15% and the expected inflation rate was +0.03%. It is not that inflation expectations have risen, but that the interest rate itself, excluding prices, has increased.
Since 2022, the S&P 500 has moved in the opposite direction to the rise in real interest rates (correlation -0.31) and in the same direction as the rise in expected inflation (+0.23). This means that what is heavy for stocks is the rise in real interest rates.

6. My view: Not contrary to past trends, but a phase to be cautious about

Stocks are rising “while facing interest rate headwinds,” not “regardless of interest rates”

The correlations so far refer to the direction of weekly movements. It does not mean that “interest rates and stock price levels move in opposite directions.” Even if the correlation is -0.27, less than 10% of stock price movements can be explained by interest rates. If earnings grow, stock prices can rise even if interest rates are rising.
In fact, the correlation for the last 52 weeks is -0.29, and stocks were indeed more likely to fall in weeks when interest rates rose. Even so, I believe the S&P 500 rose about +15% in a year because weeks when interest rates stabilized and earnings growth, centered on AI-related companies, outweighed the headwinds.

The same combination has occurred 6 times in the past. Stocks rose, but it was volatile

Looking for periods in the U.S. where “CPI is 3% or higher, 10-year Treasury yield is +1% or higher in a year, and S&P 500 is +10% or higher in a year” overlapped, there have been 6 times since 1962. As of October 6, this condition is met.
Stock prices for the following year were positive in 5 out of 6 cases. On the other hand, if you average all months with the same combination, the rise in the following year was only +0.9% (the average for the entire period is +9.0%), and the percentage that fell by 15% or more during that time was 52% (30% for the entire period). In particular, 1987 saw a maximum decline of -33%, including Black Monday, from a form close to the current one: 3.7% CPI, a sharp rise in interest rates, and a stock price increase of over +30% in a year.
For this reason, I am wary of the current situation not as a “downward direction” but as a phase where “volatility will increase.” Note that 70% of the months with the same combination were during Chairman Volcker’s tightening period (1979-81), and since the number of cases is not large, I am viewing this strictly as a trend.

Not rare overseas. The difference is real interest rates and cheapness

Examples of high interest rates, inflation, and high stock prices occurring simultaneously are not rare overseas. Under inflation, stocks are more likely to rise nominally as real assets. However, many examples had conditions to support this.

Turkey (2022): While inflation reached about 85%, the policy interest rate was lowered to 9%. Real interest rates were significantly negative, and stocks were bought as a hedge against currency depreciation. Since 2023, the policy rate has been raised to 50%, but the rise in stock prices in dollar terms has become smaller.
Brazil (2025): With a policy rate of 15% and an inflation rate of about 5%, the real interest rate was at a high level of around +10%. Even so, the reason stock prices hit a record high was because of the cheapness of a PER of less than 10 times.
Japan (2023-26): The 10-year Treasury yield rose to about 3%, but the real interest rate remained between negative and +1%, and the escape from deflation and nominal growth supported stocks.

The current U.S. has a high real interest rate of about 3% and a high PER of about 26 times as of October 2. The difference between the earnings yield (the reciprocal of PER) and the real interest rate is only +0.9pt (Japan is about +4.6pt). The premium for holding stocks is thin, and the support is skewed toward earnings growth. I believe this phase is closer to the U.S. in 1987 or April 2024 (which saw a -17% drop the following year due to a tariff shock) than the overseas examples.

Indicators that make me increase my caution

A state where the 10-year Treasury yield continues to rise by +0.5% or more in one month
CPI exceeding 4% and accelerating again
The difference between the earnings yield and the real interest rate approaching zero

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Calculation Methods and Sources

Correlation: The correlation coefficient between the weekly change in the US 10-year Treasury yield (based on Friday closing prices) and the weekly return (logarithmic) of the S&P 500. Calculations by inflation rate and era were performed by grouping the relevant weeks.
Inflation Rate: US CPI (Headline) year-over-year change. Previous month’s values are used to ensure information released prior to the data is not included.
Monthly Aggregation: The 10-year Treasury yield’s monthly change was divided into six categories, and the S&P 500’s monthly performance was averaged for periods with inflation rates below 3% and 3% or higher. Categories with fewer data points (e.g., 8 instances for low-inflation periods of -50bp or less) are subject to higher volatility.
Real Interest Rate: Yield on 10-year Treasury Inflation-Protected Securities (TIPS) (FRB H.15). Expected inflation is the difference from the 10-year Treasury yield.
Periods with the same combination: Months where, at month-end, the previous month’s CPI year-over-year change was 3% or higher, the 12-month change in the 10-year Treasury yield was +1% or higher, and the 12-month return of the S&P 500 was +10% or higher. We aggregated the subsequent 1-year return and the maximum drawdown (weekly closing price) during that period. Consecutive months are counted as a single instance.
International examples: Approximate figures based on data published by central banks and statistical agencies of each country. Stock prices are in local currency.
Earnings Yield minus Real Interest Rate: Calculated by subtracting the 10-year TIPS yield (approx. 2.9%) from the reciprocal of the S&P 500 P/E ratio of approximately 26x (approx. 3.8%) (as of October 2, 2026).
Period: January 1962 to October 6, 2026 (Real interest rates from 2003 onwards).

Source: Compiled by the author based on data from the FRB (H.15), US Department of the Treasury, US Bureau of Labor Statistics, Yahoo Finance, and the NY Fed (ACM model). Past performance does not guarantee future results.

Disclaimer

This article shares the author’s personal investment records and thoughts and does not recommend or solicit the purchase or sale of any specific financial products. Please make investment decisions at your own risk. The figures in this article were compiled by the author based on published data and their accuracy and completeness are not guaranteed. This does not predict the future direction of interest rates or stock prices. Past performance does not guarantee future results.
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