Higher long-term rates are often very important to stock valuations. However, according to DataTrek, today's mega-cap stocks are likely to withstand the current higher rate environment.
- Nvidia Corporation NVDA It has a price-earnings (P/E) ratio of 65.8
- Eli Lilly and company LYLY even higher at 131
- Advanced Microdevices Inc. amdwith a gigantic 334
See the chart below.
DataTrek puts Shiller's current average P/E of 34.1 into some context.
The Fed's aggressive rate cycle in 2022 and 2023 didn't spook stocks as much as what happened in the 1970s, the data firm noted.
“The yield volatility of the 1970s, driven first by runaway inflation and then by the Federal Reserve's response, cast a long shadow. It took decades for stocks to overcome those events,” he added.
During the 1970s and 1980s, the volatility of Treasury bond yields increased. Ten-year rates reached 16% in 1981, before falling again to 9% in 1990 as inflation soared during two oil crises. In response, Shiller's average PER fell to just 11 times in the 1980s.
“Uncertainty around long-term interest rates has had a profound effect on equity valuations over the past 50 years,” DataTrek analysts said.
Also read: What happens if the Federal Reserve doesn't cut rates this year? The hardest mile for inflation to reach the 2% target
While there is now some discussion about whether the federal funds rate should be at 4%, 5%, or 6%, that is nothing compared to the 5%, 10%, or even 15% rates achieved over the past four decades. .
“There is increasing talk that the Federal Reserve may need to delay rate cuts this year or even raise policy rates to fully control inflation, but historical records suggest this may not affect stock valuations as much as you might think.
“However, if the Fed were to raise to 8%, 9%, or 10% and 10-year yields reset to those levels, it would be a 1970s-style problem,” DataTrek analysts concluded.
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