Can earnings continue to resist impact of rate hikes?

investmentnews.com:

Stock markets that have refused to buckle under the highest yields since 2007 face a new test. Third-quarter results will shine a light on how much those rates are already hitting profits — and what they’ll do to lofty equity valuations.

As the earnings season kicks off, corporate managers will likely be peppered with questions about how long balance sheets can resist pressure from high interest rates. The longer rates stay high, the more onerous debt refinancings will get. New projects could also be reviewed, lowering corporate investments in growth. 

Some $820 billion of US and European non-financial corporate bonds are maturing in the next 12 months. That’s about 7% of this market, according to data compiled by Bloomberg. While companies overall are not expected to run up against a maturity wall before 2025 onwards, debt-ridden companies are already feeling the pain from higher rates.

“The sword of Damocles has been hanging over highly indebted companies for a number of quarters,” said Patrick Armstrong, chief investment officer at Plurimi Wealth. “3Q earnings may see this sword drop.”

Goldman Sachs Group Inc. strategists led by David Kostin recently warned that borrowing costs for S&P 500 companies have already ticked up by the largest amount in nearly two decades, on a year-on-year basis. Of the 69 basis points of contraction in ROE in the first half of the year, nearly half came from higher interest expenses, they said. 

Since the global financial crisis, falling interest costs and greater leverage have accounted for nearly one-fifth of an overall 8.8 percentage points increase in the return on equity (ROE) of S&P 500 firms. The risk of rates now being higher for longer could prevent firms from taking on more