On the back of Q1 2021 gains, earnings projections have been raised, and valuations appear to be sustainable as long as real yields remain negative. However, the economic rebound appears to be substantially priced in, and rate hikes will limit further value gains. According to Deutsche Bank, the threat of rising interest rates is causing a rethinking of industry choices.
“If enterprises are unable to completely pass on rising commodity and other input prices to consumers, profit margins would suffer. There will be a sense that we are moving beyond a range of ‘peaks’ (e.g., in economic momentum, fiscal stimulus, and liquidity) and into a less policy-supported investment landscape underpinning all of this.”
“As we’ve seen, a very solid Q1 2021 earnings season just just kept markets happy: we need additional confidence from Q2 and Q3 earnings,” says the author.
“Market preferences are changing back and forth on a style and industry level while uncertainty persists. At this moment, a barbell strategy that includes both growth and cyclical companies appears to be acceptable. Although rising interest rates may reduce the relative appeal of technology stocks due to discounted future earnings, their long-term significance remains.”
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