Goldman Sachs looks at how volatile interest rates impact US equities

Investing.com – Corporate earnings are tipped to drive returns in the benchmark S&P 500 in 2025 even as the prospect of elevated borrowing costs threatens to weigh on results, according to analysts at Goldman Sachs.

Earlier this month, the US 10-year Treasury yield touched multi-month peaks as strong economic data and uncertainty around President-elect Donald Trump’s policy plans led investors to scale back bets on possible Federal Reserve interest rate reductions in 2025.

The uptick weighed on the attractiveness of stocks, which had surged following Trump’s November election victory amid hopes he would usher in an era of looser regulations and lower taxes.

In recent days, yields have retreated, partly due to a softer-than-anticipated reading of US core inflation in December which revived hopes for Fed cuts. Markets are also looking for more clarity on Trump’s proposals after he is sworn in as president on Monday.

Despite the dip in yields, the analysts led by David Kostin flagged that relatively higher US government bond yields could have a “limited impact” on figures posted by S&P 500 companies this year.

“Rising interest rates could […] affect corporate earnings if they weigh on economic growth,” the analysts wrote in a note to clients, although they said the performance of their cyclical and defensive baskets of stocks suggests the jump in yields has not dented traders’ optimism around the outlook for US growth.

The analysts added that their basket of rate-sensitive stocks outperformed its peers even as Treasury yields increased.

The 10-year Treasury yield is seen declining modestly to 4.35% by the end of the year, the analysts predicted, saying the market “had priced too hawkish” an outlook for the Fed.

Earnings growth, meanwhile, is expected to underpin a 9% upside to Goldman Sachs’ S&P 500 target level of 6500, the analysts said. The index ended trading on Friday at 5,996.66.