This Summer Poses A Headwind For Stocks With Distant Earnings

Figure 2: 10-Year Treasury vs. U.S. GDP Growth

Figure 2_10-Year Treasury vs. U.S. GDP Growth

Which ones?

Rising rates disproportionately hit the net present value of business ventures with the most distant future cash flows. That describes many of the flashy “no profit now” companies that populate the Russell 2000 Growth Index. Even when you exclude the 43% of that Index’s total value that is comprised of companies with negative income, it still trades at a forward P/E ratio of 25.8. That strikes me as a recipe for trouble as July 29 approaches and those firms’ “out year” cash flows get discounted at ever-higher rates.

Figure 3 shows three WisdomTree strategies in U.S. small-cap, ranked along a return on equity (ROE)-based quality spectrum. They may be a way to get in front of an interest rate spike in reaction to or in anticipation of a red-hot Q2 GDP report.

Something to think about in the next traffic jam.

Figure 3: Small Caps Along a Quality Spectrum

Figure 3_Small Caps Along a Quality Spectrum

 For standardized performance of the Funds in the chart, please click their respective tickers: DESEESDGRS.

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Disclaimer: Investors should carefully consider the investment objectives, risks, charges and expenses of the Funds before investing. U.S. investors only: To obtain a prospectus containing this ...

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