When it comes to equity valuations, the shadow of rising long-term rates can loom large. DataTrek suggests that the current higher rate environment may pose challenges, but mega-cap stocks like Nvidia, Eli Lilly, and AMD are expected to weather the storm.
- Nvidia Corporation NVDA boasts a price-to-earnings (P/E) ratio of 65.8
- Eli Lilly And Company LLY goes even higher at 131
- Advanced Micro Devices Inc AMD, with a staggering 334
Looking back, DataTrek contextualizes the current average Shiller P/E of 34.1 against historical data. It notes that despite the Federal Reserve’s aggressive rate cycle in 2022 and 2023, equities have not been as spooked as during the turbulent 1970s.
The 1970s and 1980s saw heightened Treasury yield volatility. Ten-year rates soared to 16% in 1981 before dropping to 9% in 1990 due to inflation spikes during oil crises. Consequently, the Shiller P/E average dwindled to just 11x in the 1980s.
Reflecting on the impact of long-term interest rate uncertainty over the past five decades, DataTrek analysts emphasize the profound effect on equity valuations.
While debates persist about the ideal Fed funds rate amidst inflation concerns, historical comparisons spotlight the relatively tepid rates of today compared to the elevated rates of past decades.
Speculations about potential Fed rate adjustments notwithstanding, history suggests that a modest rate hike may not impede equity valuations significantly.
However, the analysts caution that a drastic surge in rates to levels of the 1970s, such as 8%, 9%, or 10%, coupled with corresponding spikes in 10-year yields, could lead to challenges akin to those faced in that era.