Higher real interest rates should suppress earnings multiples says Goldman Sachs strategist Kostin.
During the height of the bull market – which, boy, seems so long ago – the call-option crazy punters inhabiting the Wallstreetbets channel had a favorite meme to explain why stocks would keep going higher.
Well, now “Jay Powell Go Grrr” would be more apt. The trader-friendly monetary vigilante has turned into a growling interest-rate-hiking bear. When Goldman reduced its year-end S&P 500 price target in May from 4,700 to 4,300 the market was predicting the Fed would stop its hiking cycle around 3.25%. Now traders reckon the so-caled terminal rate will be 4.6%, and Goldman’s economists see a possible peak Fed funds rate as high as 4.75% by next spring.
“However, in the past few weeks, the relationship has dislocated; equity valuations have declined from their recent peak but still trade above the level implied by the recent relationship with real rates. Based solely on the recent relationship with real yields, the S&P 500 index should trade at a multiple of 14x rather than the current multiple of 16x,” says Kostin.
Markets Wall Street faces another down day, with the S&P 500 futures contract ES00 off 1% to 3735. The 10-year Treasury yield TMUBMUSD10Y rose 5.4 basis points to 3.769%. Fears of a global slowdown pushed WTI oil futures CL.1 down 2.1% to $81.70 a barrel.
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