“Higher yields do not beget lower equity share prices if earnings are being revised up just as quickly,” strategists led by Sean Darby wrote in a note.
Another pressure point to consider is interest rates adjusted for inflation, which have staged a big decline since the pandemic to spur stocks higher through the recession.
With the recent plunge in bonds mostly driven by higher inflation expectations, real rates—as proxied by bond yields minus breakeven rates—haven’t budged that much. That’s good news for stock investors, since the link between the S&P 500 and inflation bets has been consistently positive since 2012, according to strategists at Goldman Sachs.
“Improving growth expectations often correspond with higher breakeven inflation, rising earnings expectations, and improving investor sentiment, which more than offset the higher discount rate,” a team led by Ryan Hammond wrote in a Sunday note.
Better economic expectations typically help sectors more sensitive to the business cycle like banks and commodities, which tend to fall under the category of value stocks.
JPMorgan Chase & Co. strategists in a note told clients to add domestic value sectors like financials and telecoms.
When interest rates rise, investors also typically prefer the near-term cash flows offered by these cyclical shares, rather than stocks with secular growth—like Big Tech—since their long term profits get discounted at higher rates.
Yet megacaps this cycle are in fighting form. The Nasdaq 100 has still managed to narrowly beat the Russell 3000 since bond yields bottomed out from early August.
So while tech belongs to the growth investing style that tends to underperform when rates rise, Goldman strategists argue these days the cohort might be an exception to that rule.
“Their secular and idiosyncratic growth profiles mean that changes in interest rates are unlikely to be a major driver of returns,” they wrote.
This article was provided by Bloomberg News.