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“Capex + R&D Spenders” Outperform During Periods Of Rising Rates: Goldman Sachs

It looks like the U.S. Federal Reserve is finally going to pull the trigger on an interest rate hike this fall. It has been a long time since Americans have seen an interest rate hike cycle, so Goldman Sachs Group Inc (NYSE:GS) Equity Research published a report titled Uses of cash, equity returns, and the business cycle to provide some historical perspective on how stock markets and specific industries have performed during past interest rate tightening cycles.

GS analyst Elad Pashtan and colleagues begin with an historical rule of thumb on interest rate cycles: "Firms investing for growth are rewarded during periods of improving GDP growth and rising interest rates, while firms returning cash to shareholders are rewarded when growth slows and rates decline."

Growth is rewarded during periods of rising rates

When the Fed hikes rates, capital costs will rise. This means the "potential returns" from spending/saving cash will shift materially. As the the interest rate cycle continues, American firms will see sustained increases in capital costs for the first time in almost 10 years. That said...