The Bigger Profit Growth Is, The Harder It Could Fall

The Bigger Profit Growth Is, The Harder It Could Fall
Stéphane Renevier, CFA

almost 2 years ago1 min

Mentioned in story

You probably already know that rising interest rates aren’t good for company profits, since they actively discourage consumers from spending their money. But the chart above shows just how tight the relationship between profit growth (black line) and interest rates (blue line) really is. In fact, you can see that the profit growth of S&P 500 companies has fallen during or after pretty much every Federal Reserve hiking cycle since 1990.

That suggests profit growth will suffer now that we’re headed into the next hiking cycle, which is even more of a concern than usual. See, there are three ways investors make returns from stocks: rising company valuations, high dividends, and rising profits. And since valuations are already so high and dividends so low, investors need profits to keep rising. But if history is any guide, that’s not going to happen – which could lead investors to bail on stocks in their masses.

If you think that’s about to happen, the best way to position yourself is – and forgive us if you’ve heard this one before – to go on the defensive: look at utilities, healthcare, and consumer staples companies. Some of them are relatively good value, they offer relatively high dividend yields, and they should still make money even if the economy slows to a crawl.

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