Stovall lists out five reasons why higher rates pressure stock price performances: Slower economic growth due to rising credit costs. Higher interest expense as long-term debt is rolled over. Lower intrinsic value of share prices from discounted cash-flow models. More attractive bonds at higher rates. Onerous stock dividends due to higher payout ratios during declining EPS phase in a slowing economy.
“Price pressure was also related to each sector’s debt burden, as seen in their debt-to-capital (DTC) ratios, which hint at the sectors most likely to experience pressure in coming months from rising interest expense when they roll over this debt,” Stovall said.
Since May, Telecom DTC was 57.2%, utilities DTC was 50.5% and consumer staples DTC was 49.7%, whereas the average DTC for S&P 500 index was an average 38%.
“Since early May, not only did sectors with the highest yields fall the most in price, but they were also saddled with the highest average DTC ratios.” Stovall added.
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Max Chen contributed to this article.