Higher interest rates didn’t destroy the economy

Headlines screamed it in 2022 and 2023.

Economists warned of an imminent recession every week.

Wall Street analysts slashed earnings forecasts. TV pundits – my favorite market commentators – declared that the Federal Reserve had gone too far and a hard landing was certain.

I remember every bit of it. My bet is you do, too.

On the surface, it sounded convincing. It generated plenty of clicks and views. And as I’ve talked about many times before, it caused panic-selling among people who could least afford to do so.

Then again… it also caused high-quality income investments to go on sale, sometimes to distressed levels, despite sound fundamentals.

Keep that in mind today as the markets debate whether we’re in for another rate hike or not. It’s an understandable concern considering the inflation data we got this week – which wasn’t great, to say the least.

Yet we can recognize this reality without falling into a state of doom, gloom, or outright panic again. There are still ways to profit – even in the face of interest rate uncertainty.

Few narratives were more dominant in the post-shutdown era than the belief that rapidly rising interest rates would crush the economy.

Economist Steve Hanke warned in 2022 that, “We’re going to have one whopper of a recession in 2023.” And he was hardly alone.

Economists were actually “unanimous” in their calls for a recession. The World Bank even raised serious concerns about a global downturn triggered by coordinated rate hikes.

Yet here we are nearly four years later… and the feared economic collapse never arrived.

Inflation came down from its peak without triggering the prophesied downturn. The feared wave of bankruptcies and mass layoffs in interest-rate-sensitive sectors never happened.

Instead, as it so often does, the U.S. economy proved far more resilient than economists and bureaucrats predicted. Real GDP grew a solid 2.9% in 2023, followed by 2.8% in 2024, and approximately 2.2% in 2025.

The labor market remained strong, with unemployment staying low by historical standards. And corporate America managed to survive the “recession” as well.

S&P 500 earnings per share (EPS) went from $173.56 in January 2023 to $261.31 in early 2026. And FactSet recently estimated calendar-year 2026 EPS at $331.

That’s 91% growth for what I consider to be the U.S. economy’s most important investment and economic benchmark.

Nor was it just Big Tech skewing the numbers. Remember how regional banks were supposed to be ground zero for the disaster? After the 2023 banking mini-crisis, headlines and reports everywhere warned of widespread failures, a credit crunch, and a collapse in lending.

What happened instead was that the sector stabilized.

Most regional banks strengthened their balance sheets, managed deposit flows, and saw net interest income recover despite rates staying higher for longer. While there was definite volatility, the doomsday scenario of surging failures never unfolded.

The “apocalypse now” crowd, it turned out, was wrong yet again.

Many regional bank stocks still trade at meaningful discounts today, both to their larger peers and their own historical valuations. U.S. Bancorp (USB), for instance, trades at about a 1.3x price-to-book ratio despite having one of the cheapest earnings multiples in the sector at just 10.3x.

These higher-quality regional banks’ credit metrics showed further improvement in recently released earnings reports. And the same is true of many insurance companies, select asset managers, and other financials that were supposed to struggle in a “higher rates forever” world.

These businesses are now generating strong returns on equity – despite where they’re trading at.

Most investors have the very bad habit of waiting until the headlines give the “all clear” signal. But by then, stocks are much higher since the smart money has already taken most, if not all, of the profits.

We want to be that smart money this time around as economists once again begin debating higher interest rates.

For income-focused investors, the higher-rate environment has actually been a tailwind for net interest margins and certain insurance float businesses. These are benefits the original doomsday forecasts completely missed, and I’m sure they’ll continue missing them now.

It might sound complicated, but it’s not. When you make a payment to your car or homeowners insurance company, they take that cash and invest it. Banks do the same thing with your deposits.

When rates are near zero, however, there just isn’t much extra money to be made. It’s not until they’re higher – like they are today – that these institutions can collect 4%–5% in annual interest without taking any risk.

For context, they earned just 1.25%–1.5% in 2021 before rates were hiked.

State Farm is the largest U.S. insurer in terms of premiums written. Its earnings on insurance float/premiums collected increased 59% from 2021 to 2025. Allstate (ALL), meanwhile, saw a 25%–30% increase; and that was after adjusting for a larger asset base.

My favorite “losers” from higher rates, however, are certain corporate bonds.

Brookfield Corporation (BN) has several long-dated exchange-traded bonds that yield over 6% and trade for only $0.60–$0.65 on the dollar. In 2021, they traded above par value and yielded 4%–5%.

This means investors get to enjoy more income and much greater upside potential without any additional risk. So naturally, I’ve included the best Brookfield bonds in recommendations to my High-Yield Advisor subscribers.

Though that’s not where the opportunities end.

There are so many ways to lose money in the markets – even when you’re committed to purchasing dividend-paying assets.

People think of income stocks as safe portfolio purchases. And they’re right… in theory. But in practice, there are still dangers you need to be aware of.

In this week’s Wide Moat Show, Nick Ward and I discuss one of the biggest dividend-stock pitfalls you need to know about, including five real-time examples to avoid.

Catch the full episode right here.