Goldman Sachs says interest rate expense is biggest threat to profitability, but these stocks are immune
The higher-for-longer interest rate regime poses a direct threat to company profitability, but some stocks are a lot less vulnerable to higher borrow costs, according to Goldman Sachs. "Increased interest expense was the primary headwind to aggregate ROE (return on equity) and was also a headwind across every sector this year," David Kostin, head of U.S. equity strategy at Goldman, said in a note to clients. The Federal Reserve has taken interest rates to the highest level since 2001 while forecasting one more hike this year. Stocks took a hit last month as investors adjusted their expectations for elevated rates for longer. The S & P 500 finished September down 4.9%, suffering its worst month of 2023. "If rates continue to rise or stay higher for longer, increased borrow costs would disincentivize companies to take on greater amounts of leverage," Kostin said. Goldman said it expects investors to reward stocks that are more immune to rising rates as they offer stability amid uncertainty around the economy. The Wall Street firm screened the S & P 500 for stocks with low leverage, high interest coverage and low EBITDA growth variability. Specifically, Goldman identified stocks with net debt to EBITDA below 1, EBIT to interest expense in the top quartile among S & P 500 stocks and with EBITDA growth variability in the bottom quartile. A few tech stocks came up in the screen, including Cisco , Cadence Design Systems and Cognizant Technology Solutions . Consumer name Costco is also less vulnerable to higher rates, according to Goldman.