Rate hikes are starting to weigh on US corporate profits and if they stay high for a longer period they may reverse historical trends, according to Goldman Sachs Group Inc. strategists.
Borrowing costs for S&P 500 companies have risen by the largest amount in nearly two decades, year-over-year, said strategists led by David Kostin. If they remain at high levels for a longer period, this may affect long-term profits.
Over the decades, lower interest costs and more leverage have accounted for nearly a fifth of the 8.8 percentage point increase in return on equity (ROE) of overall S&P 500 companies.
"In the new 'higher for longer' rate environment, the main risks to the S&P 500's ROE will be higher interest expense and lower leverage," Kostin wrote in a note published Friday. "Situations where interest expense and leverage continue to impact ROE."
US stocks have struggled since early August, with the S&P 500 down around 6.5% on rising bond yields and bleak economic growth expectations. Although the Federal Reserve halted its hike campaign in September, hawkish messages from officials pushed the 10-year bond yield past 4.6%, the highest level in nearly 16 years.
Goldman strategists say US tech stocks are likely to take over after the Nasdaq 100's biggest monthly decline this year. S&P 500 gains, excluding the financial sector, have continued to decline this year from their peak in the second quarter of 2022, with rising interest expenses being the biggest catalyst. They expect ROE to be stable in 2024 with a low chance of an increase due to dismal economic growth.
