Goldman Strategists Say Yields Pose Little Risk to Growth Stocks
(Bloomberg) -- Plenty on Wall Street are cautioning about the dangers of surging bond yields and expensive growth stocks. Goldman Sachs’ Ben Snider isn’t one of them.
He’s reassuring investors hurt by the recent equities selloff, following a surge in Treasury rates. “Only a modest further move in longer-term yields” is now expected, the strategist wrote in a note to clients. This means “limited further risk to growth stock valuations from the discount rate.”
Expensive stocks have had a bumpy start to the year, amid expectations that the Federal Reserve will raise rates more aggressively than previously anticipated. Higher interest rates mean a bigger discount for the present value of future profits, hurting growth stocks with the highest valuations, including technology companies, and boosting cheap or so-called value shares.
Goldman Sachs Group Inc. strategists expect 10-year Treasury yields at 2% by the end of the year, from around 1.75% today. While shorter-term rates may have more upside, these have “only a minor impact on equity valuations,” according to the note.
UBS Global Wealth Management strategists concur with this view, saying they also see 10-year yields at “around 2% over the coming months, as investors digest the Fed’s more hawkish stance along with further elevated inflation readings.” Still, this rise won’t “imperil the equity rally,” the strategists including Mark Haefele wrote in a note.
Meanwhile, a slowing economy adds one more argument in favor of growth stocks, according to Goldman’s team. “The likelihood of slowing economic growth in 2022 is an argument in favor of growth stocks,” its strategists said, adding that comparisons with the tech bubble at the turn of the century may not be entirely appropriate. “Adjusting for the interest rate environment, growth stock valuations look much less demanding today than they did in 2000.”
Not everyone is as sanguine about the prospects for yields and growth stocks.
“Bond markets point to further upside for value versus growth,” Morgan Stanley strategists led by Ross MacDonald wrote in a note to clients on Thursday. While a growth scare would be a major risk for value stocks, the strategists “see few signs of this fear yet.”
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