Equities in Focus

Value’s Rate Rapport
 

Display 1 shows that when the 10-year Treasury yield moves above 4.50%, price/earnings (P/E) multiples tend to contract. If rates stay elevated, investors may seek favorable fundamentals and not rely solely on multiple expansion. This backdrop helps explain why value equities remain compelling.
 

Value stocks are generally more “short duration” than high-growth equities, as more of their cash flow is realized sooner versus further out in the future. Display 2 illustrates that even when two companies generate the same total cash flow over five years, the company receiving cash earlier has a meaningfully higher present value when applying a discounted cash-flow analysis where the discount rate is elevated. After all, a dollar received today is worth more than a dollar received in the future.
 

When Waiting Pays
 

But the same does not always hold true for dividends. Display 3 demonstrates how dividend growth and high cash flow stand out among the factors most positively associated with rising 10-year Treasury yields versus cheap and high-yielding stocks. The higher-quality value factors have historically fared better than lower-quality measures like book value because they are less cyclical.
 

And investors should avoid confusing today’s yield with tomorrow’s income opportunity. The Microsoft and AT&T comparison on Display 4 demonstrates the difference. In March 2016, AT&T offered a much higher current yield than Microsoft, but by July 2026, Microsoft’s yield on cost* was higher by virtue of its steady dividend growth, while AT&T’s was lower after its dividend was cut in February 2022.
 

Our View
 

While the value opportunity set is large, themes we are emphasizing range from healthcare services for seniors, to homebuilding and renovation. And dividend growth strategies can serve as a better beta (watch On Demand The Build a Better Path, Part Two: 3-D Investing webcast series) by adding a cash-flow discipline to equity exposure. Over long horizons, that growth can be as important as the starting yield!
 

*Measures the yield based on the initial purchase price of the stock, not the current stock price. 
 

To learn more about AB’s equity investment solutions and to access other market insights, visit Equity Investments | AB.