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    "parsed_content": "Higher Rates Are Here to Stay, and Earnings Keep Pace\nWeekly Market Update\nTakeaways\nThe U.S. Federal Reserve (Fed) and Bank of Japan (BoJ) joined the European Central Bank\n(ECB) in raising rates last week. In our view, strong global growth gives central banks\nroom to lean against inflation with higher policy rates at a time where economies can\nabsorb them.\nCredit markets continue to send a positive signal despite higher rates. Banks appear more\nwilling to lend, credit creation is improving, and hyperscaler leverage remains low even\namid heavy issuance. We remain focused on staying up in quality and short in duration in\nfixed income.\nHigher rates have yet to dent corporate fundamentals, and earnings growth is broad across\nsectors. Rising real yields have compressed valuations, which we see as a rational\nde-rating rather than fear. Our equity stance remains constructive and unchanged for\nnow.\nThis Week in Charts\nFigure 1: Fed had room to hike, and markets\napproved of the move\nThis graph shows the Chicago Fed National Financial Conditions Index\nsince 2018.\nSource: Bloomberg as of September 18, 2026. Indices are\nunmanaged. An investor cannot invest directly in an index. They are shown for\nillustrative purposes only and do not represent the performance of any specific\ninvestment. Index returns do not include any expenses, fees, or sales charges,\nwhich would lower performance. Past performance is no guarantee of future\nresults. Real results may vary.\nLooking Closer\nLoose financial conditions gave the Fed room to act. Chairman Kevin Warsh said the\ncommittee removed a \u201cdose of accommodation,\u201d and risk asset price movement signaled the\nmarket approved of the hike and signals of further tightening.\nKate Moore\nChief Investment Officer\nJeff Puckette\nMacro Portfolio Strategist\nJP Coviello\nHead of Portfolio Strategy\nConrad DeQuadros\nHead of Economics\nOlaolu Aganga\nHead of Portfolio Construction & Analytics\nMarket and Data Recap\nCentral banks lean against inflation from a position of strength\nThe Fed and the BoJ joined the ECB in raising rates last week, which continues the global\nshift toward tighter monetary policy. The Fed raised its policy rate by 25 basis points. The\nBoJ also hiked by 25 basis points to 1.25%, its highest policy rate in over three decades.\nThe onset of a hiking cycle is not a historically attractive time to buy duration, which\nsupports our underweight stance in the near-term.\nMarkets read BoJ Governor Ueda's guidance as more dovish than he likely intended, and the\nyen has declined in the days since. In our view, a weaker yen may support Japanese equities\nin the near term, because it has historically coincided with stronger earnings for Japanese\ncompanies. Analysts have revised earnings sharply higher across most Japanese sectors this\nyear. We continue to watch this balance closely, particularly if the BoJ turns more hawkish\nand the yen durably strengthens.\nThe Fed's decision fits the framework we laid out in January.\nAt the time, we argued that strong real growth and sticky inflation would create a nominal\ngrowth environment that supports higher policy rates, not lower ones. Many strategists\nexpected multiple cuts this year, and markets have since priced those cuts out. In our view,\nthe unanimous decision sends two messages: first, the Fed sees broad-based inflationary\npressure and remains committed to its 2% target. Second, it continues to act independently\ndespite political pressure.\nLoose financial conditions gave the Fed room to act (Figure 1). The Chicago Fed\u2019s National\nFinancial Conditions Index has stayed on the loose side, and that backdrop has driven\nequities to all-time highs, kept credit spreads near historic tights, and kept volatility\nrelatively contained. Markets judged the hike as prudent for now: through the day after the\ndecision, the S&P 500 rose 0.5%, the VIX fell 9.2%, the U.S. dollar index gained 0.6%, the\nten-year Treasury yield declined 4 basis points, and U.S. credit spreads tightened 3 basis\npoints.\nSome critics argue that higher rates hurt rate-sensitive areas such as housing, and that\nthis weakness weighs on the broader economy. We see it differently. Residential investment\nis weak due to structural supply issues, including local zoning and regulatory limits on new\nbuilding, which drive that weakness more than a 25-basis-point hike does. Meanwhile,\nnonresidential investment grew 9.5%, with AI spending driving much of that gain, while goods\nand services consumption remains robust. We would focus on the majority of economic sectors\nthat support higher policy rates rather than highlighting the few that are weak.\nBottom line: Central banks are leaning against inflation at a time when, in\nour view, economic growth remains resilient enough to absorb higher rates. By reducing the\nrisk that inflation expectations become entrenched, tighter policy should help preserve\nprice stability and support a constructive backdrop for risk assets. Against this backdrop,\nwe maintain a risk-on bias and an underweight duration as policy rates move higher.\nDebt markets adjust to higher rates without flashing warning signs\nIn our view, higher rates are here to stay, both at the policy level and further out on the\nyield curve. On the lending side, the credit tailwind we flagged in December is subtly\nplaying out. The Fed's Senior Loan Officer Opinion Survey shows that banks are no longer\ntightening lending standards, and the composite has moved back to neutral. Loan demand has\nalso strengthened, particularly among large-and medium-sized firms.\nHard data support the survey. The ratio of bank loans and leases to deposits keeps climbing,\nwhich points to more lending activity. We would not call this a credit boom, but with banks\nmore willing to lend, credit creation has improved at the margin despite higher rates.\nThe bigger story sits on the borrowing side. Hyperscalers have issued upwards of $250\nbillion of debt this year, over twice their total for all of last year. We acknowledge that\nthis new supply has put some upward pressure on technology, media, and telecom (TMT)\nspreads. However, we distinguish between heavy debt supply and problematic leverage.\nProblematic leverage develops when debt builds up relative to earnings, rates rise, and\nsomething breaks. In our view, hyperscaler debt does not fit that description today.\nStrong profitability also supports these borrowers. Among the ten largest companies in the\nS&P 500, gross margins have risen from 47% in 1995 to 58% today, and EBITDA margins have\nclimbed from 21% to nearly 40%. We believe these companies can service debt at higher rates,\nparticularly because revenue from the AI buildout appears to have only just begun.\nFigure 2: Despite massive issuance this year,\nhyperscaler leverage remains low\nThis chart shows the debt to EBITDA multiple for leverage and net leverage\nsince 2018.\nSource: Factset as of September 21, 2026.\nInvestment grade and high yield spreads remain tight despite the new supply. That keeps our\nfixed income positioning relatively simple. We favor staying up in quality, keeping duration\nshort at the front end of the curve, and taking risk in equities instead of reaching for\nspread. Ultimately, we believe higher rates pose a greater challenge for sovereign financing\nthan for corporate solvency. In our view, weak fiscal discipline and rising public sector\nleverage are a bigger concern for markets today than private sector debt.\nBottom line: Economies are adjusting to higher rates, but credit markets\ncontinue to reflect healthy fundamentals despite headline-grabbing issuance numbers. Within\nfixed income, we favor staying up in quality and at the front end of the curve to help\nmanage duration and supply risks.\nEarnings strength offsets valuation pressure as real yields rise\nClients often ask at what level higher rates begin to hurt equities. Many strategists cite a\nspecific 10-year yield threshold, then move it as yields rise past it. We find fixed\nthresholds difficult to apply in today's environment. In our view, higher rates would need\nto hurt fundamentals to meaningfully hurt equities, and fundamentals remain strong. We also\nbelieve the pace and volatility of rate moves matter more for earnings revisions than the\nlevel itself, and both have stayed relatively orderly.\nAnalysts continue to revise earnings higher around the world, particularly in the U.S. and\nJapan. U.S. macro data that typically lead realized earnings growth also points to robust\nlevels in the near-term. Realized earnings growth has recently beaten even what the lofty\nmacro data implied.\nEarnings breadth is also stronger than many investors appreciate. Many investors describe\nthis as an AI-only market, yet nine of 11 sectors show above-trend earnings growth on a\nfive-year z-score basis, and nearly half show top-quintile growth (Figure 3). Net margins\nalso remain extremely elevated across most sectors. Small caps are the one area where we see\ngreater rate sensitivity. Our call for small-cap underperformance has not played out this\nyear, but we believe any further tightening in financial conditions would weigh more on\nsmall caps than on large caps.\nFigure 3: Earnings breadth continues to\nimpress\nThis bar graph shows the earnings per share and z-score from quarter 2 from\ndifferent sectors.\nSource: Factset as of September 21, 2026. Sectors are using their\nrespective S&P indices as proxy. Indices are unmanaged. An investor cannot invest\ndirectly in an index. They are shown for illustrative purposes only and do not\nrepresent the performance of any specific investment. Index returns do not include\nany expenses, fees, or sales charges, which would lower performance. Past\nperformance is no guarantee of future results. Real results may vary.\nHigher rates show up in valuations instead. Rising real yields raise the discount rate\napplied to future cash flows and pressure price-to-earnings multiples. Over the past year,\nthe S&P 500 forward P\/E has declined as the U.S. five-year real yield has risen. Forward\nmultiples have fallen across major regions since their post-Covid peaks, yet global equities\nhave still delivered strong performance because earnings have grown rapidly. In our view,\nthis is a rational de-rating driven by strong growth and higher real yields, not a signal of\nfear.\nWe continue to monitor several risks to the bull market thesis. First, a disorderly rise in\nyields could constrict economic and corporate growth, so we track the pace and makeup of any\nmove for signs that multiples have found a floor. Second, another spike in geopolitical\ntension that drives oil near $125 per barrel for an extended period could pressure margins\nand consumption. Third, we also watch whether consumers can withstand another round of\ninflation pressure, and we\u2019ll get a read on this as third quarter earnings begin to roll out\nin coming weeks. Finally, AI capital spending underpins much of the market story. We see no\nevidence yet that this investment cycle is failing to produce adequate returns, and we\nbelieve it can continue for years. We continue to monitor circular financing and regulatory\ndiscourse, but insatiable demand gives us no reason to change our stance as of yet.\nBottom Line: Higher rates have yet to derail the fundamental story, and\nstrong, broad earnings growth continues to offset valuation pressure from rising real\nyields. We are watching yields, oil, the consumer, and AI investment closely, but none of\nthese risks change our constructive equity stance at this point.\nKate Moore\nChief Investment Officer\nJeff Puckette\nMacro Portfolio Strategist\nJP Coviello\nHead of Portfolio Strategy\nConrad DeQuadros\nHead of Economics\nOlaolu Aganga\nHead of Portfolio Construction & Analytics\nSee our weekly CIO Strategy Bulletin for more details\nDownload\nCIO Strategy Bulletin\nCiti\u00ae Self Invest:\nEarn Up to $1,000\nwhen you fund a Citi Self Invest account and complete all\nthe requirements.\nLearn More",
    "author_name": "Kate Moore, Jeff Puckette, JP Coviello, Conrad DeQuadros, Olaolu Aganga",
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    "section": "Weekly Market Update",
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    "ai_headline": "Higher Rates Are Here to Stay, and Earnings Keep Pace",
    "ai_simplified_title": "Citi Analysts Discuss Higher Rates and Earnings Growth",
    "ai_excerpt": "Central banks globally are raising rates, which the article argues economies can absorb due to strong growth. Credit markets remain positive, and corporate fundamentals are holding up, with broad earnings growth offsetting valuation pressures.",
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