{"id":31239,"date":"2023-07-04T09:22:53","date_gmt":"2023-07-04T13:22:53","guid":{"rendered":"https:\/\/ifintechworld.com\/markets\/the-stock-market-is-shrugging-off-higher-rates-corporations-hold-the-key\/"},"modified":"2023-07-04T09:22:55","modified_gmt":"2023-07-04T13:22:55","slug":"the-stock-market-is-shrugging-off-higher-rates-corporations-hold-the-key","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=31239","title":{"rendered":"The Stock Market Is Shrugging Off Higher Rates. Corporations Hold the Key."},"content":{"rendered":"
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The fact that stocks are powering ahead even though the Federal Reserve has made it clear that more rate increases are likely on the way is one of the mysteries of the 2023 bull market. Moves that companies made in 2020 are part of the answer.<\/p>\n

The personal-consumption expenditures price index rose at an annual rate of 3.8% in May, far above policy makers\u2019 2% target, so the central bank still needs to reduce demand for goods and services, with negative effects for economic growth, as it seeks to rein in inflation. Already, growth has begun to slow down. <\/p>\n

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But the stock market is looking through any potential additional economic weakness, much to the surprise of some on Wall Street. The S&P 500 has gained about 24% from a major low point hit in early October, putting it back into bull- market territory. <\/p>\n

While people have spent a little less in areas such as housing, consumer spending appears likely to remain strong, while investors are assuming that business spending will recover relatively quickly. That indicates corporate earnings will remain just fine.<\/p>\n

And while the 10 rate increases the Fed rolled out starting in March 2022 have lifted the bank\u2019s target for the fed-funds rate to between 5.00% and 5.25% from near zero, companies are relatively protected. The ultralow rates the Fed offered early in the pandemic offered an opportunity to lock in low borrowing costs, and companies took advantage. <\/p>\n

That has shown up in companies\u2019 income statements. Over the past year, interest expense was about 2% of aggregate sales for
\n S&P 500
\n companies, down from almost 3% just before Covid-19 hit in 2020, according to RBC. That means for every dollar of sales, companies have fewer dollars of interest they owe. <\/p>\n

Partly driving that is a strong picture for sales and demand for goods and services. While forecasts for sales have fallen a touch in recent months, they are still expected to increase year over year. Revenue growth is slowing down, but analysts for S&P 500 companies do expect 2% sales growth this year in aggregate, according to FactSet. That would be enough growth to offset any increase in interest payments.\u00a0<\/p>\n

Interest expenses aren\u2019t that burdensome in any case. When rates were low in 2020, companies binged on borrowing for the long term, raising cash to meet what they expected to be a prolonged surge in sales and profits. Now, the average due date on principal payments for borrowings by companies in the S&P 500 is about eight and a half years away, according to RBC.<\/p>\n

Total net debt\u2014outstanding borrowings minus cash\u2014on the S&P 500 is less than two times the earnings before interest, taxes, depreciation, and amortization expected for the coming 12 months. That\u2019s below a recent peak of near 2.5 times, so companies have ample profits and cash to cover their debt.\u00a0<\/p>\n

All that makes it easier for companies to borrow at relatively low rates today, which is a positive factor for stock prices. Lenders and bond investors have decided, for the moment, that companies are likely to be able to repay their debts with ease, so they aren\u2019t demanding incredibly high rates if companies need to borrow. <\/p>\n

Many fairly high-grade 10-year bonds currently trade at yields that are less than 4% right now, according to FactSet, which is barely above the 3.8% yield on 10- year Treasury debt. That indicates the bond market believes that corporate debt is only a little more risky than borrowings backed by the federal government.<\/p>\n

It matters in three related ways. First, companies can cheaply access the cash they need to grow. Second, low borrowing costs allow a greater share of revenue to flow through to the bottom line. And third, low yields on corporate bonds give investors more reason to invest in stocks, rather than fixed income, with the potential to drive share prices higher. <\/p>\n

The Fed is doing all it can to tame inflation. The stock market has a lot of reasons to shrug off the pain.\u00a0<\/p>\n

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com<\/p>\n<\/p><\/div>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

The fact that stocks are powering ahead even though the Federal Reserve has made it clear that more rate increases are likely on the way is one of the mysteries of the 2023 bull market. Moves that companies made in 2020 are part of the answer. The personal-consumption expenditures price index rose at an annual […]<\/p>\n","protected":false},"author":1,"featured_media":31240,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"gallery","meta":{"footnotes":""},"categories":[241],"tags":[83],"class_list":["post-31239","post","type-post","status-publish","format-gallery","has-post-thumbnail","hentry","category-markets","tag-featured","post_format-post-format-gallery"],"yoast_head":"\nThe Stock Market Is Shrugging Off Higher Rates. 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