The benchmark S&P 500 slipped 5% from its all-time high as inflation and potential changes in Fed policy awakened investors to the idea that easy money could touch down. its end.
“We continue to believe that the speed and composition of rate movements will matter more to short-term stocks than the level of rates,” wrote a team of Goldman Sachs strategists led by Ryan Hammond. “Equities remain attractively valued relative to the level of interest rates.”
Without any change in the price / earnings ratio of the S&P 500, the 10-year yield would need to rise from its current level of around 1.5% to over 2.3% for the relative values ââof stocks to be expensive relative to their values. long-term averages.
Since September 14, the benchmark 10-year yield has climbed 26 basis points, from 1.28% to 1.54%, as investors began to consider the possibility that the Federal Reserve would start cutting back on its purchases of ‘assets before the end and to raise interest rates early on. like next year due to inflation concerns.
At the same time, the real yield on the 10-year Treasury, which takes inflation into account, increased by 20 basis points, from -1.05% to -0.85%.
Goldman strategists say investors should pay close attention to the latter.
âStocks generally have a hard time digesting large increases in interest rates induced by interest rates,â Hammond wrote.
While less dramatic than the rate changes earlier this year, the current moves have centered on Fed policy as opposed to improving the economy, making the S&P 500 more vulnerable, according to Goldman strategists.
This and the fact that the information technology and communication services sectors currently account for 40% of the S&P 500 market capitalization. These sectors are strongly oriented towards growth and are particularly sensitive to rising interest rates. .
These growth stocks have already started to lag, and Goldman says short-term value stocks will outperform in the short term, but not as much as at the start of the year in a less favorable economic environment.
“While we continue to expect short-term stocks to outperform in the short term if rates continue to rise, our overall macroeconomic outlook of low rates and low-trending economic growth supports maintaining long-term positions. in high quality industry growth stocks, âGoldman said. the strategists wrote.