There are several reasons why rising interest rates can hurt stock prices. One of the most fundamental is that higher interest payments can cut into a company’s earnings.
Sam Stovall, the chief equity strategist at S&P Capital IQ, analyzed how the Standard & Poor’s 500 index has performed since the yield on the 10-year Treasury note began its rise from 1.63 percent in early May to 3 percent last week.
The 10-year note is used to set rates on loans including mortgages and commercial loans.
The three sectors of the S&P 500 with the steepest stock price declines were telecommunications, utilities and consumer staples. What did they have in common? High dividend yields and a high debt burden. That’s a concern because rising interest rates make it challenging for these companies to pay a high dividend relative to their stock price. It can be even more difficult at a time when earnings are likely to slow as consumers cut back.
Stovall identified stocks that are inclined to be pressured by rising rates. He started with stocks rated “Sell” or “Strong Sell” by S&P Capital IQ analysts. Of those, he screened for stocks with a long-term debt-to-capital ratio of 40 or higher, and a dividend yield of 2.5 percent or more.
“One can tread water more effectively when not tied to an anchor,” he wrote in a note to clients.