Will Rising Rates Hurt Stocks?
Will higher interest rates bring down stock prices? Many investors are concerned about rising rates but an examination of current stock valuations relative to bonds reveals that stocks haven’t priced in how low interest rates have become and therefore may not suffer as rates climb.

  • EPS “yield” is calculated by dividing EPS for the next 12 months by a stock’s current market price. It indicates the percentage of each dollar invested in the stock that is estimated to be earned by the company over the next year, similar to the current yield of a bond.

  • Historically, the EPS yield on stocks has been approximately equivalent to those of Treasury bonds but since the Global Financial Crisis when central banks slashed interest rates, equity yields have been much higher than bonds, which indicates that equities have been trading at an attractive valuation relative to bonds.

  • Similar to the Taper Tantrum of 2013 when rising interest rates only briefly hurt stocks before equities went on to post strong gains, the current cushion between equity and bond yields may indicate that investors need not worry that falling Treasury bond prices will drag down stocks with them.​

The views expressed are the views of Fred Alger Management, Inc. as of November 2018. These views are subject to change at any time and they do not guarantee the future performance of the markets, any security or any funds managed by Fred Alger Management, Inc. These views are not meant to provide investment advice and should not be considered a recommendation to purchase or sell securities.

This material must be accompanied by the most recent fund fact sheet(s) if used in connection with the sale of mutual fund shares. 

Risk Disclosure: 
Investing in the stock market involves gains and losses and may not be suitable for all investors. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Many technology companies have limited operating histories and prices of these companies' securities have historically been more volatile than other securities, especially over the short term. Technology companies may also face increased competition, government regulation, and risk of obsolescence due to progress in technological developments. 

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