Do Higher Rates Hurt Stocks? Bill Miller IV on What the S&P 500’s “Average” Q3 Is Hiding

The S&P 500 gained 2.3% in the third quarter, an average result on the surface. Underneath, four stocks generated nearly twice the index’s entire gain while the other 496 stocks collectively lost 1.9%. Despite the pessimism around higher rates, history suggests rising yields have often been followed by strong equity returns, and today’s rates create one of the best opportunity sets for patient capital in decades.

Was Q3 really an average quarter for the stock market?

On the surface, yes. The S&P 500 advanced about 2.3%, in line with the long-term return for the asset class, and the index closed the quarter just 1.89% below its all-time high.

How narrow was the market in Q3?

Very narrow. Four stocks, Apple, Microsoft, Nvidia and Meta, contributed 4.23% to the index, nearly twice its entire gain. The remaining 496 stocks collectively lost 1.92%.

Beneath the surface there was heavy churn:

83% of the index closed the quarter at least 10% below its 52-week high. More than 200 of the 500 names, over 40%, were at least 20% below their 52-week highs. The Russell 2000 fell 7.2%.

Why did stocks pull back?

Commentators pointed to spiking oil prices, a concurrent spike in interest rates and reduced growth expectations. That fueled one of the most widely circulated charts of the quarter: when the 10-year Treasury yield rises above 5%, the correlation between stocks and bonds flips, and higher yields start to coincide with lower stock prices.

Do higher rates hurt stocks?

Not the way that chart implies. It rests on short-term correlations and misses the bigger picture. Research covering every 12-month period since 1985 looked at times when the 10-year yield rose 1 percentage point over three to seven months. The S&P 500 was higher a year later in 9 of 11 instances, with an average return of 11.7%.

Why are higher rates a more productive environment for capital?

Because investors have more options today, at a given level of volatility, than they have had in a long time. Coming out of COVID, five-year TIPS yields were negative, a guaranteed negative real return for lending to the government, and investors cared more about return of principal than return on capital. At the end of Q3, five-year TIPS offered a guaranteed real yield of 2.70%, a level not seen since the global financial crisis.

High real yields reflect an economy in a good place with strong demand for capital. That is also a good backdrop for stocks. Investors willing to manage a little extra volatility, pay attention to valuations and stay patient have reason to expect better returns than in the past.

Where are the value opportunities after the Q3 pullback?

There are pockets of froth in the market. There are also many compelling value opportunities, especially among the smaller-cap names that sold off in Q3.

Read Bill’s full Q3 letter, Higher Rates. Higher Returns.

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Views are as of the October 27, 2026 MVP LIVE discussion and may change.

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