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Investors haven’t had much to complain about over the past few years. From 2023 through 2025, the S&P 500 provided a real return — that is, return net of inflation — of more than 20% per year, on average, according to data from investment firm Allspring. In fact, you could have earned better than 10% per year investing in stocks in developed and emerging international markets, as well as in a portfolio split 60/40 (or 40/60) between U.S. stocks and bonds.
Looking forward, however, investors may be anticipating at least one source of potential agita: higher interest rates.
Wall Street expects the Federal Reserve to raise its benchmark rate this week, following Chairman Kevin Warsh’s recent speech in Jackson Hole, Wyoming, in which he expressed concern about persistent inflation.
The market is pricing in a 90% likelihood that the federal funds rate will rise a quarter point following the central bank’s meeting on Wednesday, according to the CME FedWatch Tool. And should inflation fail to fall back toward the Fed’s 2% annual target — the consumer price index was up 3.4% over the 12 months ending in August, according to the Bureau of Labor Statistics — interest rates could remain elevated or even head higher, economic experts say.
“There was a big expectation that the Fed would start cutting rates aggressively and yields would go back down to you know very low levels. And that hasn’t happened, nor do we think it will happen,” says Lawrence Gillum, chief fixed income strategist for investment firm LPL Financial. “We think we’re in this kind of higher for longer interest rate environment.”
Here’s what market experts say higher rates could mean for your portfolio.
Higher rates mean higher yields on bonds
If you’re interested in investing in bonds for income, higher interest rates may be welcome news, says Gillum.
“We think there is a lot of value in the fixed income market for those savers and investors that rely on a steady income,” he says. “You’re getting yields [on some bonds] that are in the 5% to 6% range, which 10 years ago would have been unheard of.”
Indeed, investors are earning more interest on both short- and long-term bonds than they were a decade ago. In September 2016, a 1-year Treasury yielded about 0.6%, according to the board of governors of the Federal Reserve System, compared with the 4.3% you can earn today. A 10-year Treasury — a common proxy for long-term rates — paid 1.7% a decade ago and now yields almost 5%.
While short-term bond rates generally move alongside the Fed’s benchmark rate, longer-term rates are governed by the public bond market, which, among other factors, tends to respond to expectations of higher inflation by demanding higher yields on long-term bonds.
Both rising rates and inflation pose a risk to bond investors. Bond prices and rates move in opposite directions. If you own a bond ETF or mutual fund, that investment may decline in value should the Fed raise rates. The longer the fund’s duration — a measure of interest rate sensitivity — the greater the potential decline in price.
That’s why Gillum suggests holding individual bonds whose maturity aligns with your investment horizon. If you need your money back in 5 years, for instance, you could purchase a 5-year Treasury, which is virtually guaranteed to pay you your money back, with interest, when it matures.
But remember: Because a bond’s interest rate is fixed, higher inflation can eat into the value of your returns. Gillum recommends allocating a small portion of your bond portfolio to an inflation hedge, such as Treasury Inflation-Protected Securities. The principal value of these bonds, known as TIPS, rises in lockstep with the consumer price index, the government’s main measure of inflation. TIPS pay interest based on this fluctuating principal twice per year, and at maturity, you receive the greater of the inflation-adjusted and original price — never less than what you put in.
Stock returns may be ‘muted’
Higher interest rates are traditionally thought to be a headwind for stocks, since higher borrowing costs can eat into businesses’ bottom lines and slow consumer spending. Plus, stocks tend to look like a less attractive investment if bonds are offering higher returns with, typically, much lower risk.
“If the 10-year yield goes over 6% in the next month or two, that would upset the apple cart,” says Ryan Detrick, chief market strategist at Carson Group, a wealth management firm.
Overall, though, Detrick remains bullish on the economic situation for stocks, since the current bout of inflation is coinciding with what he sees as robust growth in both corporate earnings and gross domestic product.
One potential concern for stock investors, however, is valuation, essentially the price tag investors are paying to own stocks relative to their underlying fundamentals. The S&P 500 currently trades at more than 20 times its projected earnings for the next 12 months, according to S&P Global.
That puts the index, and its return prospects, in shaky historical territory, says Jon Baranko, chief investment officer at Allspring. Data from the firm shows that, from 1991 through 2025, firms trading at more than 20 times earnings have a mixed track record at delivering inflation-beating returns over the subsequent 10 years.
“History would suggest that we’re kind of in a period where we might have more muted returns,” Baranko says.
That doesn’t mean he recommends abandoning stocks altogether. Rather, he urges investors to stick with a diversified approach, noting that, given strong returns in the sector, pricey technology stocks may now dominate investor portfolios more than they think. By trimming some winners in favor of more undervalued areas of the market, such as small- and midsize-company U.S. stocks and international names, Baranko says investors can expose themselves to more of the market’s potential upside in the coming years.
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