The latest rise in interest rates is different than similar moves earlier this year, and that should change which stocks outperform, according to Goldman Sachs. Treasury yields jumped last week, with the 10-year Treasury hitting its highest yield since 2007. David Kostin, the firm’s chief U.S. equity strategist, said in a note to clients over the weekend that higher rates should hurt growth stocks more now that some of the excitement around artificial intelligence and a resilient U.S. economy have cooled. Kostin pointed to the divergent moves of two stock baskets to prove this point. Long duration stocks, which have the bulk of their projected earnings and cash flow far off in the future, have started to underperform short duration stocks that are generating significant cash already. “The Long Duration leg held up better than history would suggest in the summer because fears about recession and solvency for loss-making companies eased. Recent investor focus on AI has also supported the performance of long duration stocks, many of which are perceived beneficiaries of AI enthusiasm,” Kostin said. “However, with bond yields recently rising due to factors outside of an improving growth outlook, our Long Duration basket has lagged by 6 pp (-8% vs. -3%) since Sep. 11.” Goldman’s short duration basket includes several old economy stocks that have outperformed the broader market in September. HF Sinclair and U.S. Steel are up 4.5% and 2.9%, respectively, month to date. Those gains have come even though both stocks have hold ratings from the majority of analysts that cover them, according to data from LSEG. U.S. Steel has also been the subject of merger and acquisition speculation in recent months, which could cause additional volatility for the stock. For investors looking for short duration stocks that have not yet started to outperform, shares of rental car company Hertz Global are down 20% month to date. Overall, the short duration stocks highlighted by Goldman have lower valuations and a stronger near-term earnings picture than the long-duration stocks. “The median stock in the Long Duration basket trades at an [next 12 months enterprise value-to-sales] multiple of 5x vs. 2x for the median stock in the Short Duration basket. 50% of companies in the Long Duration basket are expected to post negative EPS in 2023, compared with 6% for Short Duration,” Kostin said. Goldman’s long-duration basket has several stocks that have been trendy at times over the past few years but have proven to be volatile bets. The basket includes Rivian , Lucid and Teladoc . — CNBC’s Michael Bloom contributed to this report.
