Equities in Focus

Interest Rates and Valuations 
 

Display 1 shows a demarcation line of sorts regarding 10-Year US Treasury note yields—once they cross 4.50%, price/earnings 

(P/E) multiples meaningfully contract. And the higher rates climb from elevated levels, the worse pressure on equity prices becomes when inflation fears are in play. Clearly, earnings growth has been strong, and fundamentals also matter (related content), but so does the cost of money (i.e., interest rates). And when rates rise, leadership tends to change. 
 

Equity Factors’ Rate Influence 
 

Factor data reinforce that higher-rate environments reward quality and cash-flow discipline—companies with strong return on assets, solid interest coverage and healthy free cash flow tend to hold up better. By contrast, valuation-sensitive factors like high P/E stocks, and high volatility and momentum equities, have historically lagged as discount rates rise and multiples reset (Display 2).  
 

Momentum Has Positively Evolved 
 

But this cycle may not be a simple rerun of the past. In many prior periods, momentum has often been associated with expensive, crowded trades. Today, however, the picture looks more balanced. Display 3 shows momentum stocks still sit in a favorable zone, supported by strong forward earnings expectations but without the most extreme valuations seen elsewhere in the market. In other words, momentum stocks are not always speculative plays, and perhaps the cohort today could extend their trends. 
 

Our View 
 

While momentum can struggle as rates rise, the broader market remains underpinned by the strongest earnings season since 2021, and these companies may prove more durable this cycle. Rising rates often affect valuations, and if inflation concerns remain the culprit, the market could correct from here. If a correction does happen, we advise leaning into dispersion, not away from risk entirely. And recognize that even in a higher-rate world, the right kind of growth can still win. 
 

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