Rates are on the move again. Across major economies, central banks have resumed raising policy rates in a bid to tame stubborn inflation. The war in the Middle East is the most obvious culprit behind rising prices, but it isn't the whole story: tighter monetary policy and heavier government borrowing are adding pressure too.

Nowhere is that pressure more visible than in the 10-year U.S. Treasury yield, which has climbed steeply since the start of the year, as the charts below show.

With rates now elevated, many investors are once again focused on the familiar seesaw between interest rates and bond prices: when one goes up, the other comes down.

For stocks, the story is more nuanced.

Higher rates do shrink the present value of future earnings and cash flows, but equities have something bonds don't: earnings, dividends, and cash flows that can grow.

And when rising rates arrive alongside a strong economy and robust corporate performance, some of the pressure on equities may be offset. 

Earnings: The Bright Spot

The Middle East crisis may be dominating the headlines, but U.S. corporate earnings have quietly delivered one of the year's most encouraging stories.

As FactSet reported, a remarkable 86% of S&P 500 companies beat earnings per share (EPS) estimates in Q2 2026, the highest share since Q2 2021, and Q1 2026 told a similar story.

Why does this matter? Because strong earnings help determine whether rising rates signal strength or cause for concern.

In the good scenario, yields rise because demand is healthy, productivity is improving, or capital spending is expanding, and climbing earnings expectations can offset some or all of the pressure on valuations.

In the less welcome scenario, yields rise because inflation expectations are worsening, energy prices are spiking, fiscal worries are mounting, or investors are demanding more compensation to hold long-term bonds.

Considering Quality as Rates Rise

So which U.S. companies may be better suited to a rising rate environment?

One approach some investors consider is focusing on companies with a strong quality profile: durable earnings, strong cash flow, healthy balance sheets, limited refinancing needs, and pricing power.

These characteristics may help businesses manage higher borrowing costs. Quality factor ETFs provide one way to gain exposure to these companies.  

So far this year, the quality factor has delivered a better investment experience than the broader market, as the chart below shows. Past performance does not guarantee future results.

For Canadian investors interested in U.S. quality factor exposure, examples of available ETFs include the BMO MSCI USA High-Quality Index ETF (Tickers: ZUQ/ZUQ.F), iShares MSCI USA Quality Factor Index ETF (Ticker: XQLT), and Fidelity U.S. High-Quality Index ETF (Tickers: FCUQ/FCUQ.U/FCQH).

The BMO MSCI USA High-Quality Index ETF tracks the MSCI USA Quality Index, which targets U.S. companies with high return on equity (ROE), stable year-over-year earnings growth and low financial leverage. It carries an MER of 0.33%.

The iShares MSCI USA Quality Factor Index ETF tracks the MSCI USA Sector Neutral Quality Index, which offers exposure to large- and mid-cap U.S. stocks with strong fundamentals: high return on equity, stable year-over-year earnings growth, and low financial leverage. It carries an MER of 0.32%.

The Fidelity U.S. High-Quality Index ETF tracks the Fidelity Canada U.S. High Quality Index, which is made up of companies with strong balance sheets and more stable cash flows than the broader U.S. equity market. It carries an MER of 0.38%.

This article was written on October 21st, 2026. Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.