Interest rates continue their inevitable march upwards to combat soaring inflation with the Federal Reserve’s meeting this week. It’s worth stepping back to take a look at equity performance historically compared to interest rates so advisors and investors can have a clearer idea of investing expectations.

Equity market valuations continue to fall from their peaks within the last year, with rising interest rates a proven headwind for valuations and are the case for several reasons, explains Mark Hackett, chief of investment research for Nationwide’s Investment Management Group, on the Nationwide blog.

“Higher interest rates are a headwind to valuations for several reasons, such as their impact on earnings, discount rates applied to future earnings, and competition for investor funds with bond funds now providing a more attractive yield,” writes Hackett.

Image source: Nationwide Blog

Since the 10-year Treasury note’s lowest point of 0.54% in July 2020, it has gained 2.41%, ending last week at 2.95%. Over the same period, the forward price/earnings multiple of the S&P 500 fell from 21.9x to 18.7x forward earnings currently.

Tech stocks have highlighted this decline prominently, with the immensely popular FAANG stocks of the last decade, comprised of Meta (Facebook), Apple, Amazon, Netflix, and Google, falling from their peak at 52-times forward earnings to 27x now. It’s a “notable shift in leadership, but consistent with the transition in the business cycle,” explains Hackett.

Investing in the current environment has been a somewhat unique experience as there has never been a calendar year that has seen both the S&P 500 and the Bloomberg U.S. Aggregate Bond Index benchmark negative in the same year. The S&P 500 year-to-date has had a -7.4% return while the Agg has experienced a -9.3% return, with the bond index tracking for its worst year on record.

“If rising rates continue and put additional pressure on equity valuations, investor returns are likely to suffer,” writes Hackett.

For advisors looking for retirement income options for their clients, Nationwide offers a variety of actively managed ETFs for advisors that cater to a range of investment exposures and strategies within the major indexes while seeking a measure of downside protection. These funds include the Nationwide Nasdaq-100 Risk-Managed Income ETF (NUSI), Nationwide S&P 500 Risk-Managed Income ETF (NSPI), Nationwide Dow Jones Risk-Managed Income ETF (NDJI), and the Nationwide Russell 2000 Risk-Managed Income ETF (NTKI).

For more news, information, and strategy, visit the Retirement Income Channel.