Where will monetary policy institutions like the US Federal Reserve (Fed), European Central Bank (ECB) and Bank of England take interest rates? This is one of the most debated questions amongst financial outlets Fisher Investments UK reviews. But we think it is very overrated. Our research shows equities’ direction doesn’t depend on where policy rates head.
As Exhibit 1 shows, rate moves over the past 20 years don’t have preset market effects. Global equities rose alongside the ECB’s 2006 – 2007 rate hikes. Then, sharp 2008 – 2009 rate cuts coincided with a bear market (fundamentally driven decline exceeding -20%) – they didn’t stop the slide. We have seen many analysts point to the two rate hikes in April and July 2011 as premature, blaming that year’s equity-market decline on them. But this overlooks that period was the height of the region’s sovereign debt crisis and economic downturn.[i] Now, the cuts thereafter overlapped with rising equities. So did 2024’s. However, 2022 – 2023 rate hikes didn’t stop equities’ rise, either. When Fisher Investments UK reviews the relationship, equities’ trajectory doesn’t depend on monetary policy institutions’ rate actions.
Exhibit 1: Global Equities Undeterred by Rising Rates
Source: FactSet, as of 17/3/2025. MSCI World price index in pounds and ECB main refinancing rate, 31/12/2005 – 31/12/2024.
Despite these historical data, numerous publications Fisher Investments UK reviews continue to argue policy rates somehow have a huge, preset impact on equities’ direction. In our view, this long-running misperception stems largely from textbook ways we find many investors have learned to value securities: using theoretically risk-free short-term rates, for example, and comparing those with equities’ earnings yield – the inverse of their price-to-earnings (P/E) ratio or E/P, expressed as a percentage. This facilitates comparison of the earnings yield to interest rates, with the difference between them known as the equity risk premium (ERP).
This may appear to make intuitive sense. If the so-called risk-free rate is at least higher than earnings yields, why invest in allegedly riskier equities when returns from less volatile short-term cash yields seemingly suffice? When rates are low or falling – much lower than earnings yields – the thinking Fisher Investments UK sees suggests equity demand (and therefore prices) should rise.
But again, the evidence for this is lacking. Using America’s S&P 500’s earnings yield and 3-month US Treasury yields (which closely track the Fed’s overnight policy rates based on our studies) for their long history, short-term rates have topped US equities’ earnings yields several times – rendering its ERP negative, ostensibly an unfavourable condition for markets. (Exhibit 2) But those don’t necessarily cause or coincide with bear markets. Notably, that has been the case since January 2023 – near the start of the current bull market (rising equities).[ii] Nor have earnings yields’ exceeding short rates prevented bear markets (see the 1930s through the 1960s).
Exhibit 2: Equities’ Earnings Yield Versus 3-Month US Treasury Yield
Source: Multpl.com and US Federal Reserve Bank of St. Louis, as of 17/3/2025. S&P 500 earnings yield and 3-month Treasury yield, monthly, January 1934 – January 2025.
Exhibit 3: A Negative ERP Isn’t Necessarily Alarming
Source: Multpl.com and US Federal Reserve Bank of St. Louis, as of 17/3/2025. S&P 500 earnings yield minus 3-month Treasury yield, monthly, January 1934 – January 2025.
Why don’t markets follow such commonly held theories? Fisher Investments UK’s reviews of equities’ main drivers show rates don’t determine equities’ path. Based on our research, equities move most on the gap between earnings expectations and reality over the next 3 to 30 months. We find rates are one variable amongst many in that calculus. Moreover, rate decisions are one of the most widely monitored and heavily analysed events amongst financial commentators we follow. In our view, share prices largely reflect much of this information, and that scrutiny further reduces surprise potential.
So when Fisher Investments UK reviews seemingly ubiquitous commentary about rates’ supposed effect on markets, we suggest investors don’t overrate rates. We see little to indicate they drive equities.
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This document constitutes the general views of Fisher Investments UK and should not be regarded as personalised investment or tax advice or a reflection of client performance. No assurances are made that Fisher Investments UK will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. Nothing herein is intended to be a recommendation or forecast of market conditions. Rather, it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. In addition, no assurances are made regarding the accuracy of any assumptions made in any illustrations herein. Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square, Canary Wharf, London, E14 5AX, United Kingdom. Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission.
Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission. Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.
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[i] Source: FactSet, as of 17/3/2025. Statement based on eurozone GDP, Q1 2011 – Q4 2011, and 10-year Portugal, Ireland, Italy, Greece and Spain sovereign bond yields, 31/12/2010 – 31/12/2011.
[ii] Source: FactSet, as of 17/3/2025. Statement based on S&P 500 total returns, 12/10/2022 – 14/3/2025. Presented in US dollars. Currency fluctuations between the dollar and the pound may result in higher or lower investment returns.