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US equities could prove more resilient to higher interest rates than historical comparisons suggest, with economic growth, healthy household and corporate balance sheets and the rising dominance of globally diversified technology companies providing support, Emkay Global said in a research report.
The brokerage remains relatively constructive on equities despite renewed pressure on long-term Treasury yields, arguing that bond-market volatility rather than the absolute level of yields is the bigger risk. Markets have increasingly focused on the possibility that a US 10-year Treasury yield above 5 per cent to 5.25 per cent could trigger a sustained equity sell-off. Emkay, however, said there are limited historical parallels for the current environment because the US economy and market structure have changed materially since previous episodes when yields were at comparable levels. The S&P 500 has more than tripled from its Covid lows and risen around 2.4 times since the end of 2019, supported by a combination of fiscal-led growth, resilient household finances, strong corporate balance sheets and the growing weight of technology companies. Emkay highlighted that US households continue to have relatively strong balance sheets, with high cash buffers and contained debt-service ratios. Corporate credit fundamentals are also resilient, with interest-coverage and other balance-sheet metrics broadly at or above historical averages, providing a cushion for earnings. The composition of the equity market is another important difference. Technology companies now account for 37 per cent of the S&P 500, compared with 15.5 per cent in 2007 and 17.4 per cent in 2001. The brokerage noted that large technology companies are increasingly globally diversified, asset-light and cash-generative, making them less dependent on domestic US growth and potentially less mechanically sensitive to higher Treasury yields. AI investment could further reinforce this dynamic. Hyperscaler capital expenditure is expected to exceed 3 per cent of US GDP over the next three years, while companies are reporting productivity gains from AI adoption. "Growth may again matter more than the absolute level of yields," Emkay said, pointing to the 1990s, when the 10-year Treasury yield averaged about 6.65 per cent while equities delivered strong returns. The brokerage expects equities to remain a relatively constructive asset despite elevated yields, although it cautions that a sharp rise in Treasury-market volatility could still create significant disruptions across risk assets. (ANI)
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