Goldman Sachs: Increased Rates Would Hurt Stocks

Goldman Sachs recently reported that if a sudden rise in rates is seen, it could possibly derail the stock market. The S&P 500 went down 5% as changes to the Fed policy and high inflation rates hinted towards to a contracting market.

Strategists at Goldman Sachs wrote, “We continue to believe the speed and composition of rate moves will matter more for equities in the near-term than the level of rates. Equities remain attractively valued relative to the level of interest rates.”

The S&P 500’s price-to-earnings ratio the 10-year yield would need to increase over 2.3% for its relative equity value to be expensive. The 10-year yield has climbed around 26 basis points to 1.54% since September 14. Investors believe the fed will begin tapering of assets and will likely increase interest rates by next year as inflation continues to grow.

On the other hand, the 10-year treasury yield rose by 20 basis points to 0.85%. Experts said, “Equities typically struggle to digest sharp real-rate increases in interest rates.”

The current moves are based on the Fed policy instead of the improving economy which makes S&P 500 vulnerable. IT and communications are the top sectors which account for 40% of the S&P market cap and are particularly sensitive to changes in interest rates.

Goldman Sachs has reported that short-duration value stocks are likely to excel in the upcoming term but not as much as they did earlier this year. Strategists wrote, “While we continue to expect short duration stocks will outperform in the near-term if rates continue to rise, our overall macro outlook of low rates and low trend economic growth supports maintaining longer-term positions in high quality sector growth stocks.”

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