Corporate profits are starting to feel the pinch of higher interest rates, but so far their stocks are holding up. Companies will need to grow those earnings, however, if they don’t want their shares to feel the pain.
It isn’t just that revenue growth has been paltry, as the Federal Reserve has aimed to cool inflation with interest-rate hikes. But companies are also grappling with higher interest expenses on their debt. Firms refinancing any debt have to borrow at significantly higher rates compared with just last year.
That, in theory, should hit companies’ bonds—and ultimately their stocks. Higher borrowing costs make it harder for firms to pay their debts, which should hit the price of their bonds—and in turn lift the interest rate they can borrow at even further. That would pressure their equity valuations. Newsletter Sign-up Consistent with that, the stock market is up this year—the S&P 500 has climbed 18% so far in 2023. The index continues to trade at a rich valuation, at just over 19 times analyst’s expectations for per-share earnings over the next 12 months, according to FactSet. That is essentially unchanged from March 2022, just before the Fed started lifting rates.
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