- Borrowing costs soared by largest amount in nearly two decades
- S&P 500 profitability continues to decline from 2022 peak
Rising rates are starting to weigh on US corporate profits and if they stay higher for longer it may upend a historical trend, according to Goldman Sachs Group Inc. strategists.
Borrowing costs for S&P 500 companies have ticked up by the largest amount in nearly two decades, on a year-on-year basis, strategists led by David Kostin said. If they remain at high levels for an extended period of time, this may prevent firms from taking on more leverage, hitting long-term profitability.
For decades, falling interest costs and greater leverage have accounted for nearly one-fifth of an overall 8.8 percentage points increase in the return on equity (ROE) of S&P 500 firms, according to the strategists.
“In the new ‘higher for longer’ rates environment, the key risk for S&P 500 ROE will be higher interest expenses and lower leverage,” Kostin wrote