Jan 24, 2022, 4:52 PM ETInterview

As Rates Reprice and Stocks Sell Off, What’s Next?

Markets have shifted from a "taper but no hikes" pricing expectation in September 2021 to pricing in four rate hikes in 2022, with Fed funds rates projected to reach 1.75% by the end of next year.
Bond yields have risen sharply in the first weeks of 2022, driving a broad equity sell-off that disproportionately affected high-growth, low-margin technology stocks.
Goldman Sachs Economics forecasts approximately four rate hikes in 2022, followed by three in 2023 and three in 2024, resulting in a flattening yield curve where short-term rates rise faster than the 10-year Treasury.

Energy, materials, industrials, and financial stocks have outperformed due to their cyclicality, higher oil prices, and potential benefits from rising interest rates.
Technology stocks with high revenue growth but low or negative profit margins have been "severely punished" as higher rates reduce the present value of distant future cash flows.
High-growth technology companies currently operating with high margins (approx. 25% net) have experienced a "muted decline" compared to their low-margin peers.
The valuation gap between high-growth/high-margin and high-growth/low-margin stocks has narrowed to a ~2 enterprise value-to-sales multiple point difference, reverting to pre-pandemic levels seen in early 2020.
Analysts note a "dramatic repricing" of nearly 50% in late 2021 valuations, suggesting much of the negative interest rate impact is now priced in, though further declines remain possible.

Goldman Sachs forecasts net margins for U.S. publicly traded corporations to rise by ~40 basis points in Q4 to reach a record high of 12.5%.
Management has historically demonstrated "nimbleness" in 2021 to maintain record margins despite headwinds including supply chain disruptions, labor shortages, and surging commodity prices.
Upcoming Q4 earnings season will focus on whether companies can successfully pass through input cost inflation to customers via price increases without significant volume degradation.
Corporate buybacks are expected to provide significant share price support, with over $1.25 trillion in share repurchase authorizations from last year slated for execution in 2022.
Future growth expectations for 2022 are projected at roughly 8%, driven primarily by steady margin improvement rather than top-line acceleration.

As of late 2021, investors are the most underweight on TMT stocks and most overweight on energy, materials, industrials, and banks relative to S&P 500 weightings in the last five years.
Institutional investors are shifting from "dip-buying" strategies to more tactical approaches, including reducing net and gross exposure, holding higher cash levels, and increasing hedging frequency.
Hedge funds are increasingly focused on "definitive catalysts" such as spin-offs, M&A activity, and special dividend dates rather than broad thematic positioning.
A potential surge in M&A activity is expected in 2022, particularly via corporate spin-offs (to SPACs, private equity, or independent public companies) to improve margins in a decelerating growth environment.
High-yield credit markets are seeing potential upgrades as marginally profitable companies strengthen their balance sheets, though negative net issuances are anticipated for the year.
Global interest rate markets, including Japan, are being scrutinized as potential hedging opportunities given the global nature of inflationary pressures.

Forward guidance on 2022 outlooks in Q4 earnings will be a critical driver of market sentiment, specifically regarding the ability to sustain earnings amidst inflationary pressure.
If the Federal Reserve is perceived to make a "policy misstep" by tightening too aggressively during a potential GDP slowdown, high-growth secular leaders could regain a valuation premium.
Equity allocations by major investor classes (households, mutual funds, pensions) are at a record 53% of assets, with bonds and cash making up 20% and 12% respectively, limiting attractive alternatives in the U.S. asset class.
Private market valuations for high-growth companies may become less attractive than public market counterparts, creating potential for capital to flow back into public equities where prices have corrected.
Key risks to monitor include the durability of corporate earnings (concerns of "over-earning" during the pandemic stimulus era) and whether inflation will settle at 2.5% or remain near 3.5% long-term.