The US economy is sending investors two very different messages. Growth remains surprisingly resilient, inflation is no longer accelerating, and consumers are still spending. Yet beneath that strength, households are saving less, labor demand is cooling, and real borrowing costs are climbing to levels that could eventually force both consumers and businesses to retrench.

For private equity, the important variable is no longer simply what the Federal Reserve does next. It is whether long term capital costs stay elevated even as the Fed becomes less inclined to tighten.

Second quarter real GDP growth was revised upward from 1.5% to 2.2%, while consumer spending growth was lifted from 3.4% to 3.8%. Strip out trade, inventories, and government spending, and underlying domestic private sector demand grew at an annualized 4.6%. That hardly looks like an economy begging for monetary relief.

Inflation has also stopped getting worse. The PCE deflator rose 3.4% in August versus a year earlier, unchanged from July, while core PCE increased 3.0%. That combination of resilient growth and relatively stable inflation has reduced expectations for aggressive Fed tightening.

But the bond market is telling a different story.

The ten year Treasury yield has moved above 5.3%, its highest level since 2002. More importantly, the move appears to be coming largely from real yields rather than rising inflation expectations. The chart captures that shift clearly. As the real ten year Treasury yield approaches 3%, the S&P 500 forward valuation has compressed toward roughly 19 times earnings.

That relationship matters well beyond public equities. A higher real risk free rate raises the discount rate applied to virtually every financial asset. For private equity, that translates directly into more expensive acquisition financing, tougher refinancing math, lower acceptable entry multiples, and greater resistance to premium exit valuations.

In other words, even if the Fed pauses, financial conditions can still tighten.

The drivers may also prove difficult to reverse quickly. Heavy technology sector borrowing to finance data centers is increasing demand for capital, while concerns around fiscal sustainability may be pushing investors to demand a larger premium for holding long duration government debt. If those forces persist, sponsors cannot assume that stable or lower policy rates automatically bring back the cheap financing environment that powered earlier deal cycles.

Consumer resilience deserves similar scrutiny.

Real disposable income was unchanged in August, yet real consumer spending rose 0.6%. Households funded that gap partly by reducing the personal saving rate from 4.6% in July to 4.1% in August. In January, the saving rate stood at 5.6%.

That is strong consumption, but it is not necessarily strong household economics.

The labor market adds another warning signal. September produced only 29,000 new jobs, down from 133,000 in August, while unemployment rose from 4.1% to 4.2%. Average hourly earnings increased just 3.0% from a year earlier, the weakest pace since May 2021. With inflation still above that level, real earnings are under pressure.

For consumer focused portfolio companies, this creates a dangerous combination. Revenue can remain healthy for several quarters even as the balance sheet supporting that spending deteriorates. Lower saving can temporarily protect discretionary demand, but it cannot substitute indefinitely for real income growth.

For dealmakers, the macro message is therefore less contradictory than it first appears. The economy remains strong enough to keep long term yields elevated, but parts of the household and labor picture are weakening enough to limit how long that strength can persist.

The result is a narrow underwriting window. Buyers should assume financing costs remain structurally higher, test consumer businesses against slower spending growth, and resist relying on multiple expansion as an exit strategy.

The Fed may be getting closer to the sidelines. The cost of capital is not.

Board of Governors of the Federal Reserve System (US), Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity, Quoted on an Investment Basis [DGS10], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DGS10, October 8, 2026.

Bureau of Economic Analysis. (2026). Disposable Personal Income. https://www.bea.gov/data/income-saving/disposable-personal-income 

Bureau of Economic Analysis. (2026). Personal Income and Outlays, August 2026. https://www.bea.gov/news/2026/personal-income-and-outlays-august-2026 

Deloitte. (2026). Weekly Global Economic Update. https://www.deloitte.com/us/en/insights/topics/economy/global-economic-outlook/weekly-update.html#Contradictory 

Federal Reserve Bank of St. Louis, 10-Year Breakeven Inflation Rate [T10YIE], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/T10YIE, October 8, 2026.

Goldman Sachs. (2026). Weekly Market Monitor. https://am.gs.com/en-us/advisors/insights/article/market-monitor-weekly