What Do Higher Interest Rates Mean for Equities?

04.06.2022: The 10-year Treasury yield broke through 2.6 per cent this morning on hawkish Fed comments, leaving the benchmark Treasury yield more than one percentage point higher than when 2022 began. The implications for equities are fraught. “Fair value” in the equity market is a function of two factors: earnings and interest rates. All other things being equal, higher earnings tend to boost equity prices while higher interest rates tend to depress them. Since the beginning of the year, earnings growth estimates have been raised to nearly 12 per cent. Interest rates, however, are also meaningfully higher. This suggests stock prices should be lower year to date, and they are. The S&P 500 Index is off nearly five per cent so far this year, while the NASDAQ is more than nine per cent cheaper. International and emerging equities are off similarly. But have markets adjusted enough?

Graph 1, Market Update, 04.06.22

The math says markets are not down enough to compensate for today’s higher interest rates. The table below was a snapshot of various interest rates and earnings growth rates taken at yearend 2021. At that time, S&P 500 earnings were expected to grow by eight per cent this year and the 10-year yield was 1.51 per cent. Since then, the 10-year note has pushed through 2.5 per cent and earnings growth is estimated at 11.7 per cent. By our reckoning, the S&P 500 should be off 16 per cent, not five per cent.

Graph 2, Market Update, 04.06.22
Cresset Favicon

About Cresset

Cresset is an independent, award-winning multi-family office and private investment firm with more than $50 billion in assets under management (as of 06/06/2024). Cresset serves the unique needs of entrepreneurs, CEO founders, wealth creators, executives, and partners, as well as high-net-worth and multi-generational families. Our goal is to deliver a new paradigm for wealth management, giving you time to pursue what matters to you most.

Receive Weekly Market Updates

From Chief Investment Officer, Jack Ablin.
We use cookies to improve your web experience, analyze site usage, and deliver personalized content to you. Some cookies are essential to site functionality, others are optional and help us see how the site is used or allow us to better service you.  By clicking “Accept” you are accepting all cookies. To better understand how cookies are used by us or to opt-out, visit Terms of Use.