#美股光通信板块收跌 Why Haven’t U.S. Stocks Fallen Yet: EPS Growth Is Offsetting Valuation Declines!

Why Haven’t U.S. Stocks Fallen Yet: Corporate Profits Are Battling a 5.27% Risk-Free Rate
The U.S. stock market is currently in a seemingly contradictory state. On one hand, corporate earnings continue to grow. FactSet expects S&P 500 third-quarter EPS to increase approximately 29.5% year over year, potentially marking the third consecutive quarter of growth above 25%. On the other hand, the U.S. 10-year Treasury yield has risen to 5.27%, while the 10-year real interest rate has reached 2.91%. Meanwhile, the S&P 500’s forward 12-month P/E ratio has declined from 20.4x at the end of the second quarter to 19x. Earnings are rising, valuations are falling, yet Treasury yields remain elevated.
Why have U.S. stocks not fallen significantly and instead remained strong? The answer can be summed up in one sentence: EPS growth is offsetting valuation declines, allowing stock prices to remain strong; however, because Treasury yields are already close to the earnings yield on stocks, the market’s margin of safety is very thin.

I Stock Prices Essentially Have Only Two Engines
From the simplest valuation formula: stock price = earnings per share EPS × price-to-earnings ratio PE
EPS represents how much a company can earn, while the P/E ratio represents how much investors are willing to pay for each dollar of profit.
Over the past few years, U.S. stocks have sometimes risen because both engines were working simultaneously: corporate profits were growing, and investors were willing to assign higher valuations. Such markets rise most easily because both the numerator and the multiple expand at the same time. But the situation is different now. The earnings engine is still pushing forward, while the valuation engine is moving in the opposite direction. Suppose an index has EPS of $100 and a P/E ratio of 20.4x, corresponding to an index price of 2,040 points. If EPS grows 10% to $110 while the P/E ratio falls to 19x, the index price would still reach 2,090 points. Although the valuation declined by approximately 6.9%, the stock price would still rise by approximately 2.5% because EPS grew faster.
Mathematically, when the P/E ratio falls from 20.4x to 19x, EPS needs to grow by only approximately 7.4% to fully offset the valuation compression. Therefore, as long as earnings growth remains above this threshold, U.S. stocks can continue rising through profit growth even without valuation expansion. This is the core reason U.S. stocks have not been crushed by high interest rates.

II This Is Not a Valuation Bull Market; Earnings Are Supporting the Market
FactSet data shows that S&P 500 third-quarter EPS is expected to grow 29.5% year over year, above the 26.7% forecast at the end of June; quarterly EPS estimates have also not been lowered as usual, but instead increased by 1.4%. Normally, analysts continually lower forecasts as earnings season approaches, reducing the “difficulty of the test” for companies, but this time forecasts have been revised upward. Meanwhile, the S&P 500’s forward 12-month P/E ratio has fallen from 20.4x to 19x, slightly below the average of the past five years and close to the average of the past ten years. This means that recent gains in U.S. stocks have not been driven by investors becoming increasingly optimistic and willing to pay ever-higher prices; instead, corporate earnings are growing fast enough to absorb the valuation decline.
In other words, the market is shifting from “valuation-driven” to “earnings-driven.” This is generally healthier than relying solely on valuation expansion because stock prices are genuinely supported by profits. The problem, however, is that when the market relies primarily on earnings growth, earnings reports cannot contain significant disappointments. As soon as EPS growth slows, the high-valuation problem previously concealed by earnings will reemerge.

III What Does a 5.27% Treasury Yield Mean?
A 19x P/E ratio corresponds to a forward earnings yield of approximately: 1 ÷ 19 = 5.26%, while the 10-year U.S. Treasury yield is approximately 5.27%. The two are nearly equal. This does not mean stocks and Treasuries are completely indistinguishable. Treasury returns are relatively fixed, while corporate earnings can grow; stocks can also generate additional returns through dividends, buybacks, and long-term productivity improvements. Therefore, one cannot simply subtract the Treasury yield from the earnings yield and treat the result as the complete equity risk premium.
However, this comparison still reveals an important fact: investors are currently receiving almost no obvious initial yield compensation. Buying 10-year Treasuries provides a nominal yield of approximately 5.27%; buying the S&P 500, based on current earnings, provides an earnings yield of only approximately 5.26%, while stocks also carry risks including declining earnings, valuation compression, and price volatility. Therefore, investors continue to hold stocks not because their current yield is clearly higher than that of Treasuries, but because they believe corporate earnings will continue to grow in the future. This means the entire market is built on a very clear premise: future EPS must continue to grow, and the growth rate must be sufficient to compensate for the additional risks stocks bear relative to Treasuries. Once this premise is shaken, the market will quickly reprice itself.

IV Why High Interest Rates First Hit Valuations
Long-term Treasury yields can be understood as the benchmark interest rate for asset pricing. The higher the yield, the lower the present value of future profits when discounted back to today. As of October 6, the U.S. 10-year real interest rate had reached 2.91%, while the nominal rate was 5.27%, a difference of approximately 2.36%. This shows that elevated long-term rates are driven not only by inflation expectations, but also by very high required real returns. Rising real interest rates most readily hurt companies that depend on distant future profits. If most of a company’s value comes from five or ten years in the future, raising the discount rate will significantly reduce the present value of those distant cash flows. This is why, when facing the same high-rate environment, large technology companies with ample cash flow and already-realized profits are generally more resilient than small growth companies that are not yet profitable and rely on financing to expand.
But the impact of high interest rates will not remain limited to valuations forever. Eventually, it will also affect business operations: debt refinancing costs will rise, consumer borrowing costs will increase, demand for real estate and durable goods will decline, and the return threshold for corporate capital expenditures will rise. In other words, high interest rates initially compress P/E ratios and may subsequently suppress EPS. Once these two pressures occur simultaneously, stock prices will no longer merely adjust gradually and could experience a “double kill” in both earnings and valuations.

V The Real Risk for U.S. Stocks Lies in Earnings Concentration
Current earnings data is strong, but not all sectors are improving simultaneously. FactSet data shows that only three sectors had their third-quarter EPS estimates raised: energy by 18% and information technology by 3.5%; estimates for the other eight sectors actually declined. Materials, consumer staples, and healthcare saw relatively large downward revisions. This indicates that although overall S&P 500 EPS growth is very strong, it is still significantly driven by a small number of sectors and large companies. As long as large technology, energy, and communication services companies continue to deliver strong profits, the index can remain stable. But if growth in these heavily weighted sectors slows, other sectors may not be able to take over immediately. Therefore, one cannot look only at the S&P 500’s overall EPS growth rate; one must also observe the breadth of earnings upgrades. Ten companies raising their earnings forecasts and 300 companies raising theirs simultaneously represent completely different levels of market quality, even if the final index EPS growth rate is the same.

VI Four Possible Outcomes Ahead
The most favorable scenario is that Treasury yields decline without the economy entering a recession, while corporate earnings continue to grow. In that case, EPS would rise and valuation pressure would ease, giving stock prices a dual boost.
The second scenario is that Treasury yields remain elevated but stop rising, while EPS continues to grow. This would mean valuations remain broadly stable, with stock prices rising slowly mainly in line with earnings. This may be the path the current market most wants to see.
The third scenario is that Treasury yields continue rising while EPS still grows. In that case, earnings and valuations would offset each other, and the index might remain range-bound at high levels, while divergence among sectors and individual stocks would become increasingly severe.
The most dangerous scenario is that Treasury yields continue rising while earnings forecasts begin to decline. High interest rates would compress P/E ratios, while a slowing economy would depress EPS, producing a typical “double kill” in the market. Even if Treasury yields decline, that would not necessarily automatically benefit stocks. If yields fall because of a rapid economic recession, valuation pressure may ease, but corporate earnings could deteriorate even faster. The market could still decline initially.

VII Where Exactly Is the Margin of Safety So Thin?
The problem with U.S. stocks now is not poor earnings, but that current prices have already imposed very high demands on future earnings. With the 10-year Treasury yield at 5.27%, a 19x P/E ratio cannot simply be defined as cheap. It is merely cheaper than the previous 20.4x, but may not be cheap relative to the risk-free rate. The market can continue rising, but it must be driven by genuine profits. Cloud business revenue, advertising revenue, enterprise software orders, and AI commercialization revenue need to continue growing; operating cash flow must keep pace with profits; capital expenditures must ultimately convert into free cash flow; and earnings improvements must gradually spread from a handful of giants to more sectors. If these conditions are met, a 19x P/E ratio can be gradually absorbed through EPS growth, and U.S. stocks may enter a rally centered on profits rather than valuations. If EPS growth mainly comes from a low base, a small number of sectors, accounting profits, or short-term pricing factors, while free cash flow does not improve in tandem, then the market’s seemingly lower valuation may actually reflect earnings expectations that are too optimistic.

The current U.S. stock market is neither a traditional broad-based bubble nor an undervalued market with ample protection. It is in a very delicate position: corporate earnings are strong enough to temporarily offset valuation declines, but Treasury yields are already close to the earnings yield on stocks, leaving the market with almost no valuation-based margin of safety.
Therefore, what determines stock prices in the next stage is no longer whether investors are willing to pay higher P/E ratios, but whether companies can continue delivering higher profits. As long as EPS growth outpaces valuation compression, the index can continue rising; once earnings growth peaks while real interest rates remain elevated, the market will discover that the risks previously concealed by strong profits have never disappeared.
The most accurate definition of the current U.S. stock market is a tug-of-war between corporate profits and high interest rates. Earnings currently have the upper hand, but there is almost no buffer left at the other end of the rope.