Goldman: Interest Rate Volatility Not Expected to Impact S&P 500 Earnings

The recent decline in US stocks contrasts with the jump in interest rates, with investors pondering the impact of stronger-than-expected economic data on the Federal Reserve’s monetary policy. While historically interest rate volatility has affected stock prices, Goldman strategists say the impact on earnings of US large companies may be limited. David Kostin, a Goldman strategist, said in a report on January 17: "US equity markets have generally performed in line with changes in yields over the past few months, but we expect future earnings growth — not changes in valuations — to be the primary driver of equity returns over the next few months." "The recent decline in the S&P 500 has almost entirely reflected the typical experience of a large move in rates." Data showed the S&P 500 had fallen about 3 per cent from the start of December to the weekend, while the benchmark 10-year US Treasury nominal yield rose 64 basis points to 4.8 per cent on Monday, and the real yield rose 43 basis points. Goldman’s interest rate strategists said the nominal 10-year yield would fall to 4.4 per cent by the end of the year as inflation eases and gives policymakers room to cut rates. "Higher rates persisting above our expectations will affect both earnings and valuation multiples. But the direct impact of the rise in rates on S&P 500 earnings per share should be very small. To have a meaningful impact on the earnings outlook, the higher yields need to be accompanied by a tightening of the financial environment to limit growth."