Higher interest rates have become a frequently cited risk to corporate earnings and the economy. The conventional thinking is straightforward: when borrowing costs rise, companies face higher interest expenses, profits come under pressure, and economic growth slows. While there is truth to that relationship, the current cycle may differ from investors’ expectations.
Higher interest rates have become a frequently cited risk to corporate earnings and the economy. The conventional thinking is straightforward: when borrowing costs rise, companies face higher interest expenses, profits come under pressure, and economic growth slows. While there is truth to that relationship, the current cycle may differ from investors’ expectations.
The recent rise in interest rates has raised concerns that higher borrowing costs could weigh on corporate profits and ultimately slow economic activity. However, our analysis suggests that the U.S. corporate sector appears less sensitive to higher interest rates than it was in prior decades. Specifically, net interest paid as a share of income has fallen from roughly 23% in 2010 to about 10% today — nearly a historic low.
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