Valuation is often misunderstood—many people focus solely on the P/E ratio, but that’s only half the picture; the other half is interest rates. The true value of money comes down to discounting future cash flows, and the anchor for that discount rate is the risk-free rate. When interest rates move, the denominator of every asset in the world must be recalculated—yet most people never even look at that denominator. This past September was particularly active: the Fed raised rates by 25 basis points on September 16—the first hike in over three years—bringing the federal funds rate to 3.75–4.00%, with unanimous committee approval and hints of another hike ahead. The 3-month Treasury yield stood at 4.08%, the 2-year at 4.7%, and the 10-year briefly returned to 5%. Europe joined in too: the ECB hiked on September 10, raising its deposit rate to 2.5%, its second increase in three months, as eurozone inflation surged to 3.3%. When you put these numbers together, something interesting emerges. If you put your money into short-term Treasuries and do nothing, you earn 4% annually—equivalent to an asset with a P/E ratio of about 25, with zero growth and zero risk of loss. Meanwhile, the overall forward P/E of U.S. equities is around 19x, yielding 5.2%, just 20 basis points higher than the 10-year Treasury’s 5%. That’s barely more than Treasuries—and yet you’re taking on the risk of earnings misses and sharp price declines. So relying on valuation expansion for returns now has very low odds. Going forward, profits must actually grow to generate returns. Compared to Treasuries, if the spread is tiny and the business is mediocre, it’s not worth it. Only when the spread is meaningful—and earnings are genuinely growing—is it worth serious consideration.