Why Has The US Economy Been So Resilient To Soaring Rates And Higher Oil Prices? Goldman Explains

It has become one of the most nagging questions across all of finance and economics: how is it that the US economy and stock market both remain so resilient in the face of sharply higher rates, not to mention oil prices at nosebleed levels. Over the weekend, in Morgan Stanley's Sunday Start note, head of fixed income strategy Andrew Sheets framed the question as follows: 

US 10-year Treasury yields have risen 100bp this year, while global equities are up about 13%. Those numbers sit in uncomfortable tension. Higher bond yields raise the return investors can earn elsewhere, increase the discount rate applied to future profits and, at least in theory, lower the value of equities.

But that theory has two moving parts.

Per the Gordon Growth model, the value of a stock is a function of its expected dividend payments (D) divided by r-g, the required rate of return minus growth. Higher rates push down on valuations by raising r and the denominator. Better growth pushes the other way. What matters isn't r in isolation, but the gap between the two.

While this equation may be algebra, it can be impacted by psychology. Consider a world where rates are rising alongside 'hot' market conditions. It's entirely plausible that, given that buoyant backdrop, investors find a way to raise expectations for future growth, g, even faster.

And that, we think, is exactly what's been happening.