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- Goldman Sachs has some ideas for how companies can offset higher rates by pursuing internal growth.
- The firm sees 4% as a crucial threshold for the US 10-year Treasury yield.
If US companies are going to withstand the pressure of Federal Reserve monetary tightening, they're going to have to grow.
So says Goldman Sachs, which sees 4% as a crucial threshold for the US 10-year Treasury yield. If rates exceed 4%, the firm estimates companies will have to generate 200 basis points of medium-term growth to neutralize the negative effect on valuations.
"A boost to medium-term growth expectations or a decline in the equity risk premium (ERP) could offset the negative valuation impact of rising bond yields," a group of Goldman strategists led by David Kostin, the firm's chief US equity strategist, wrote in a client note.
Goldman Sachs
It's important to note that Goldman is making recommendations in the event of a sudden, unexpected rate increase. The firm's 2018 forecast for the 10-year is just 3.25%, and it's been argued in recent weeks that at least some areas of the market will do just fine on a relative basis, regardless of how high rates go.
With that in mind, here are the five ways Goldman says companies can preempt rate-hike madness and stand tall in the face of rate hikes: