How Falling Interest Rates Fueled a Stock Market Mega-bubble (And Why It Might Be Close To Popping)

By Lee Scully and Stephen Bishop

Since the early 1980s, the world has witnessed one of the most powerful tailwinds in financial history: the steady and near-relentless decline in global interest rates. What started as a monetary policy response to the inflationary chaos of the 1970s became a multi-decade paradigm shift—one that reshaped investment behaviour, inflated asset prices, and fundamentally altered the risk calculus for savers and investors alike.

The Great Interest Rate Decline

In 1981, the U.S. 10-year Treasury yield peaked above 15%. Today, it's less than a third of that. Over the span of 40 years, central banks—particularly the U.S. Federal Reserve—became increasingly adept at taming volatility through rate cuts and liquidity injections (money printing). Each economic hiccup was met with lower rates, and over time, monetary easing (lowering rates and printing money) became the default tool to soothe markets and keep things afloat.

This prolonged rate suppression did two things:

1. It pushed capital up the risk curve: With bonds offering ever-lower yields, investors searched for returns elsewhere. Equities, private equity, real estate, and speculative tech all became increasingly attractive—not necessarily because of improving fundamentals, but because the alternatives offered so little.
2. It created an illusion of stability: Markets boomed. Volatility fell. Risk premiums compressed. The 60/40 portfolio—anchored in long-dated bonds and blue-chip stocks—looked like an unbeatable formula. But in reality, markets were becoming more fragile, not less.

When Money Printing Became Monetary Policy

Post-2008, the global financial system entered a new phase: quantitative easing. Central banks began injecting trillions of dollars into the system, not just to lower interest rates, but to directly prop up asset prices. Markets that once functioned as mechanisms of price discovery became increasingly reliant on policy signals.

This market "stability" came at a cost: rising debt, distorted incentives, and a widening disconnect between price and value. As noted in our June commentary, fundamentals became secondary to technicals, and headlines moved markets more than earnings.

Governments and central banks essentially "kicked the can down the road," substituting real structural reform with financial engineering. But the bill for decades of artificial stimulus and monetary expansion is now coming due.

The Repricing of Risk Has Begun

The past two years mark a turning point. Inflation has returned—not the temporary variety policymakers assured us of, but the kind driven by supply chain reconfiguration, geopolitical fragmentation, fiscal excess, and yes, the end of artificially cheap money.

Interest rates are no longer falling. They’re climbing—slowly but persistently. And with that, the entire market framework built on “lower for longer” is being challenged. People forget that sub-5% interest rates are not actually “normal” in the big picture, when one zooms out to look across decades. Interest rates may remain at current levels and may even head lower over the short/medium term, but in our view, over the longer term, the bigger and more persistent trend will be upwards from here.

As rates rise, the tectonic plates underpinning financial markets will shift dramatically. The gravitational pull of fixed income should grow stronger, as investors can earn higher yields. Equity valuations—once justified by the lack of alternatives—are now being questioned, and justifiably so. Capital is flowing more selectively. And for the first time in decades, investors are having to reassess what constitutes “safe.”

What Comes Next?

We believe we are at an inflection point—a structural shift where the next 40 years will look very different than the last. The rules that governed markets from 1980 to 2020 may no longer apply. As we wrote in our recent market outlook:

“The strategies that worked for the last 40 years are increasingly misaligned with the realities of today’s world.”

Inflation is not just an economic factor—it’s a political one. The return of war, nationalism, and resource competition are all inflationary. Real assets—commodities, infrastructure, and tangible productive capacity—may become the cornerstone of portfolios once again.

What Investors Can Do

• Zoom out: Don’t rely on the recent past to guide the future. We are in a new regime.
• Be patient: In a world of elevated valuations and rising risk, selectivity matters.
• Think real: Focus on assets with intrinsic value and long-term demand drivers.
• Stay nimble: Market conditions are evolving faster than ever. Passive strategies may underperform in a world defined by active shocks.

The boom of the last four decades was fueled by falling rates, cheap money, and investor psychology that assumed the past would repeat. We believe that that era is ending.

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Information in this article is from sources believed to be reliable, however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views are those of the author, Lee Scully, and not necessarily those of Raymond James Ltd. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision. Raymond James Ltd. is a Member Canadian Investor Protection Fund.