Goldman Sachs' latest assessment: Rising interest rates ≠ falling US stocks; earnings growth is the key to a bull market.

Goldman Sachs' latest assessment: Rising interest rates ≠ falling US stocks; earnings growth is the key to a bull market.

Wall Street is gripped by a “high-interest-rate panic,” with the 30-year Treasury yield soaring to a near 20-year high of 5.3% and the 10-year yield approaching 5%. But Goldman Sachs offers a starkly different perspective: rising interest rates do not necessarily mean a stock market crash; earnings are the true driver of the stock market.

According to TrendFocus, Goldman Sachs' latest research report released on September 11th concludes that high interest rates are a headwind for the stock market, but not a force that will end the bull market. As long as earnings growth remains strong and corporate balance sheets remain healthy, the US stock market bull run has a solid foundation to continue.

The report argues that although the S&P 500's forward price-to-earnings ratio has fallen from 22 at the beginning of the year to 19, the stock market's valuation relative to bonds remains stable, with the equity risk premium remaining at 3% . Don't be shaken by the initial pain of the Fed's rate hikes (historically averaging a 2% drawdown); the average return of US stocks in the 12 months following a rate hike is as high as +9% . Goldman Sachs economists expect the Fed to raise rates again by 25 basis points next week.

Goldman Sachs points out that in the current environment, corporate balance sheets are exceptionally strong. Boosting profit growth through AI investments, mergers and acquisitions, and spin-offs will be key for companies to withstand valuation declines and maintain the bull market . The bank believes that avoiding homebuilders sensitive to long-term interest rates and embracing financial stocks and targets with high growth potential is the winning strategy at present.

Valuation compression has occurred, but the relative attractiveness of stocks and bonds has remained largely stable.

The S&P 500's forward P/E ratio has fallen from 22 at the beginning of the year to the current 19. The reasons for this valuation decline are multifaceted, including AI-related uncertainties, market skepticism about the sustainability of recent strong earnings, and the direct pressure from rising interest rates.

However, Goldman Sachs' analysis reveals a key fact: the attractiveness of stocks relative to bonds has not substantially deteriorated. The "yield spread" between the S&P 500 earnings yield (5.2%) and the real 10-year Treasury yield (2.6%) is currently 270 basis points, a difference that has remained fairly stable over the past two years. The equity risk premium implied by Goldman Sachs' dividend discount model (DDM) is currently around 3%, similarly remaining relatively stable in recent years.

This means that rising interest rates have compressed absolute valuations, but have not systematically destroyed the allocation value of stocks relative to bonds , which is one of the important bases for Goldman Sachs to maintain its bullish judgment.

Historical pattern: Interest rate hikes initially put downward pressure on returns, but the average return reaches +9% after 12 months.

This week, the 10-year US Treasury yield surged to nearly 5%, its highest level since October 2023. The 30-year US Treasury yield has risen even further to 5.3%, approaching its peak in nearly 20 years. Goldman Sachs economists predict that the Federal Reserve will raise interest rates by another 25 basis points at next week's FOMC meeting following the release of higher-than-expected CPI data.

Goldman Sachs interest rate strategists believe that rising oil prices, the repricing of the Federal Reserve's interest rate hike path, strong economic growth, and the AI investment boom have all contributed to the rise in long-term interest rates.

Goldman Sachs believes that an important buffer is that the interest rate market has already priced in more than three 25-basis-point rate hikes before mid-2027 , which to some extent raises the threshold for further unexpected tightening of policy and reduces the risk of the market being hit by "hawkish surprises".

At the same time, Goldman Sachs analyzed historical data from seven interest rate hike cycles over the past few decades and found the following patterns:

  • Within three months of the start of interest rate hikes , the S&P 500 averaged a -2% return, with only a 29% probability of achieving a positive return.
  • Within 12 months of the start of interest rate hikes , the S&P 500 averaged a return of +9% , achieving positive returns every time except in 2022.

The 1997 case is particularly relevant: the Federal Reserve raised interest rates by only 25 basis points, and the S&P 500 immediately fell by 10%. However, when the market stopped pricing in further tightening, the stock market bottomed out and rebounded, reaching a new high within three months.

The medium-term impact of interest rate hikes on the stock market ultimately depends on how monetary tightening affects earnings growth —this is the core driver of the stock market. Goldman Sachs projects that S&P 500 earnings per share (EPS) will reach $340 in 2026, a year-on-year increase of 24%; and further increase to $385 in 2027, a year-on-year increase of 13%.

The stock market is more sensitive to long-term interest rates, and interest rate volatility is an additional risk.

From the underlying logic of asset pricing, stocks are essentially discounted future cash flows . Goldman Sachs' DDM model shows that approximately 75% to 80% of the present value of the S&P 500 comes from forward cash flows (i.e., "terminal value") over 10 years. Therefore, stock valuations are more sensitive to changes in long-term interest rates and have the strongest correlation with the 30-year US Treasury yield.

Furthermore, Goldman Sachs specifically emphasized that not only interest rate levels, but also interest rate volatility itself, are significant sources of risk for the stock market. Historical data shows that when interest rate changes exceed two standard deviations, the stock market typically struggles to absorb them. Currently, a two-standard-deviation change in the 10-year US Treasury yield is roughly equivalent to an increase of 40 to 50 basis points within a month. The recent rapid rise in interest rates is one of the key reasons for the pressure on the stock market.

The company has a healthy balance sheet, and large companies have limited fundamental risks.

Goldman Sachs' analysis suggests that S&P 500 stocks as a whole are currently quite resilient to rising interest rates .

Most S&P 500 companies have debt with fixed interest rates and long maturities , so the actual increase in borrowing costs is quite limited.The S&P 500's overall interest coverage ratio is at the 99th percentile over the past 20 years, and its median stock index is at the 68th percentile , both at historical highs.Interest expenses remain relatively small relative to strong corporate profits.

It is important to note that small and medium-sized companies are relatively vulnerable – their balance sheets are generally weaker, they have a higher proportion of floating-rate debt, and they are more sensitive to rising interest rates.

Corporate Response Strategies: Boosting growth is key to maintaining valuation; M&A and AI investment accelerate.

Goldman Sachs' model provides a clear quantitative conclusion: if the cost of equity rises by 1 percentage point, companies need to raise their long-term growth expectations by 2 percentage points to fully offset the impact of rising interest rates on valuations.

This pressure is prompting a variety of corporate coping strategies:

1. Increased capital expenditure and R&D investment: During this earnings season, about half of the S&P 500 companies discussed using AI technology to improve productivity during their earnings calls, while some others planned to leverage AI to explore new revenue streams. The urgent need to boost growth in a high-interest-rate environment is one of the key supporting logics for the current AI investment boom.2. Accelerated M&A activity : The value of announced M&A deals in the US since the beginning of the year has reached $1.4 trillion , while global M&A activity has increased by 36% year-on-year. M&A is an important path for companies to rapidly improve their growth trajectory.3. Business spin-offs (“slimming down for growth”): Spin-off activities have been relatively sluggish in recent years, but interest rate pressures may drive more companies to “slim down for growth” by divesting low-growth or non-core businesses.

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