In the grand scheme of things, interest rates are a drag on stock valuations. When you’re competing against bond yields, earnings multiples simply don’t stretch as far.

And logically the reverse relationship is also true. So explain to me why long-term bond yields have rolled back to where they were three weeks ago and stocks keep going down.

That’s exactly where we are today. Back on June 7, the S&P 500 was well above 4,100 and 10-year Treasuries paid 2.98% a year.

Yields surged to 3.49% in the ramp to the Fed’s latest policy meeting and stocks understandably retreated in their wake. But then something subtle happened.

Almost across the maturity curve, interest rates started heading back down as Wall Street recognized that even the most aggressive Fed posture imaginable didn’t line up with the numbers we were seeing. Today, that 10-year Treasury bond once again pays 2.98% a year.

And yet here we are, with the S&P 500 stuck below 3,800 and major stocks under serious pressure. How do the rate theorists square that as anything but an opportunity to buy back into the market ahead of a big bounce?

Coincidentally, the same people who talked the market down when yields were rising are eerily quiet about rate risk now. They’re talking about an imminent recession, which is also bad for stocks . . . but will also encourage the Fed to freeze interest rates or even take them lower if it happens.

We’ll see. Hints within the yield curve now suggest that we’ll see interest rates drop in the coming year if the economy cools too fast for the Fed’s (or our) comfort. If so, the rate bears no longer have a lot of muscle.

Of course, if there’s no overt recession for corporate earnings, there’s no material downside whatsoever for stocks in this rate environment. Three weeks ago, the S&P 500 carried a 17.5X forward earnings multiple. Now it’s more like 15.8X at worst.

Same rate environment. Maybe even a few weeks closer to rates peaking and then starting down the other side.

And slightly stronger earnings expectations. You read that right. Everyone on Wall Street did the math and the answer we got for corporate cash flow over the coming year is about 1% higher than where it was on June 7.

That might be a rounding error. It’s not worth cheering. But it’s definitely not going down. It won’t go down until we see a tangible recession . . . and not just fear and trembling.

Earning season starts in two weeks. If it’s any good, stocks will rally from here, provided of course that interest rates stay even remotely stable.

But why are rates down? I’m thinking money has started flowing into U.S. bonds because foreign economies are in worse shape than ours. That’s what happened in 2008 and even going as far back as 1997, when other currencies collapsed.

That was a rough time to be a foreign investor. Here on Wall Street, it was choppy weather for awhile as well. But then the bulls picked up where they left off.

And back then, overnight interest rates never got below 5% . . . while 10-year bonds routinely paid closer to 7% a year. The dot-com boom was just getting started. Stocks took off and a generation of wealth was born.

What’s so different now?