The rising fiscal deficit and debt level could pressure the Fed to increase its key interest rate at a faster rate. Recently, Goldman Sachs predicted that the interest rates will rise at a quicker pace. However, on May 21, David Kostin, the chief US equity strategist at Goldman Sachs, wrote in a note that investors shouldn’t worry about the rising interest rate or its impact on stock valuations.
If the US ten-year Treasury yield (BND) reaches 4%, then it would be a major concern for investors in regards to the rising interest rate and its impact on stock valuation, according to Goldman Sachs. The ten-year Treasury yield already broke the 3% level and touched 3.1% on May 17. The 3% level was the highest level since July 2011.
Kostin said, “A rise in interest rates should lead to a fall in equity prices, all else equal. An equity’s value is equal to the present value of a perpetual stream of future dividends, which are highly sensitive to the discount rate. However, lower equity prices are not an inevitable consequence of higher interest rates. We expect negative valuation changes if the level of rates approaches 4%.”
(By Market Realist)