More and more Wall Street equity strategists are sounding the alarm on the impact of higher interest rates.

The team at Goldman Sachs Group Inc. joined peers at Morgan Stanley and JPMorgan Chase & Co. warning that elevated rates could spark further declines in equities. They pointed to the divergence between the S&P 500 stock index and 10-year real rates approaching the steepest in almost two decades, with the exception of 2020.

Such a decoupling implies a shrinking return for holding riskier equities compared with a safe-haven asset like US government bonds. That “may further limit the ability of equities to digest further increase in rates,” strategists including Andrea Ferrario and Christian Mueller-Glissmann wrote in a note dated Oct. 2.

Although Goldman economists don’t expect a rate hike from the Federal Reserve next month, they recommended exposure to “equity-down rates-up hybrids,” as the central bank’s so-called dot plot of projections skew toward a quarter-point increase.

Morgan Stanley’s Michael Wilson and JPMorgan Chase & Co.’s Marko Kolanovic also recently warned that a sustained increase in real rates could derail this year’s rally in stock markets. Their bearish view for 2023 has been vindicated over the past few weeks as the S&P 500 logged two straight months of declines on worries that the Fed could remain hawkish for longer than expected.

Still, Bank of America Corp. strategist Savita Subramanian sees reasons to be bullish even if borrowing costs stay high.

She says the high cost of capital has “purged weaklings,” with about 50% more companies with large market capitalizations dwindling into small caps than vice versa, a reversal from prior decades. That kind of attrition leaves the S&P 500 in “good shape,” she wrote in a note on Sept. 29.

This article was provided by Bloomberg News.