Federal Reserve's Anti-Inflation Measures Have Taken A Toll On S&P 500 Profits, Says Goldman Sachs

The Federal Reserve’s efforts to curb inflation have negatively impacted the profits of S&P 500 companies, as per a report by Goldman Sachs.

Business Insider reported that the effects of heightened interest rates have been distinctly apparent within the first half of this year.

The central bank has actively increased interest rates to address inflation, with rates currently fluctuating between 5.25%-5.5%, the highest since 2001. This has substantially affected corporate earnings by escalating borrowing costs. As a result, borrowing costs for S&P 500 firms have surged approximately 40 basis points in 2023, marking the largest increase in nearly two decades, Goldman data reveals.

The return on equity (ROE) ratio for the S&P 500 has been declining since its peak in the second quarter of the previous year, Goldman strategists noted. The ROE for the index, excluding financial stocks, has dropped 69 basis points this year to 23.4%.

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This decline, however, is still within the 97th percentile for S&P 500 ex-Financials readings for ROE dating back to 1975, according to Goldman Sachs. But the ratio could potentially worsen, particularly if the Federal Reserve maintains high-interest rates.

The bank anticipates that the S&P 500’s ROE, excluding financials, will stabilize next year, with a marginal chance of “substantial expansion” through 2024.

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