Goldman strategists see low threat from yields to growth stocks

Things may not look so grim for battered growth stocks after all, according to Goldman Sachs Group Inc. strategists.

Things may not look so grim for battered growth stocks after all, according to Goldman Sachs Group Inc. strategists. 

Following a recent selloff spurred by soaring Treasury rates, “only a modest further move in longer-term yields” is now expected, the strategists led by Ben Snider wrote in a note to clients. This means “limited further risk to growth stock valuations from the discount rate.”

Expensive stocks have had a bumpy start to the year, amid expectations that the U.S. Federal Reserve will raise rates more aggressively than previously anticipated. Higher interest rates mean a bigger discount for the present value of future profits, hurting growth stocks with the highest valuations, including technology companies, and boosting cheap or so-called value shares.

Goldman’s strategists expect 10-year Treasury yields at two per cent by the end of the year, from around 1.75 per cent today. While shorter-term rates may have more upside, these have “only a minor impact on equity valuations,” according to the note. 

Not everyone is as sanguine about the prospects for yields and growth stocks.

“Bond markets point to further upside for value versus growth,” Morgan Stanley strategists led by Ross MacDonald wrote in a note to clients on Thursday. While a growth scare would be a major risk for value stocks, the strategists “see few signs of this fear yet.”