background image background image background image

Do higher interest rates lead to lower investments?

Picture of Peter Garnry
Peter Garnry

Chief Investment Strategist

Summary:  The conventional wisdom goes that higher interest rates cool the economy and investments are negatively impacted, but data on S&P 500 since 2003 suggest the opposite. When the US 10-year yield is in its fourth quartile this is actually when the subsequent one year growth rate in S&P 500 investments across research and development, and capital expenditures is the highest. Given all the talk about recession it is also worth noting that the growth in total investments among S&P 500 companies is now the highest in 11 years.


High growth in investments among S&P 500 companies

Accounting rules generally do not allow a lot of intangible investments to be capitalized on the balance sheet and thus we often only discuss capital expenditures when analysts are writing about investments among companies. But investments in brands (marketing expenses) or products (research and development expenses) are often expensed over the income statement and thus left out. While marketing expenses are rarely separated in foot notes the R&D expenses are and thus we can at least calculate the total investments in the S&P 500 by adding capital expenditures and R&D expenses.

The current level of total investments in the S&P 500 is $174 per share which is around 10% of revenue and 4.4% of the current market value and up 19.2% from a year ago. The current growth in total investments in the S&P 500 Index is the highest since late 2011 as the global economy was accelerating out of the Great Financial Crisis. Before that this level of growth was seen around the period 2005-06 as the global credit boom was lifting corporate sentiment and investments. While many CEOs talk about uncertainty, higher interest rates, and changing globalisation they are still confident enough to make big investments for the future. This underpins the argument that the economy will not even do a soft landing but accelerate and likely overheat adding to inflationary 
27_PG_1
27_PG_2

Will high interest rates kill growth?

We have been through period, and maybe we are still in it, where our lack of causal understanding of what drives inflation have been illuminated. If we understand inflation dynamics properly then we would most likely not have ended up in the current situation, but that is of course pure speculation. The other day one economist was mentioning that the higher interest rates were increasing costs for businesses as their floating loans were constantly refinanced at higher interest rates and that investments would likely decline. It sounds plausible that when capital gets more expensive that investments would be negatively impacted. But what if the causality is the other way around? What if low interest rates actually signals that few interesting investments are available in the economy.

If we split the US 10-year yield into quartiles then we can measure the growth in investments in the S&P 500 over the subsequent 12 months. The fourth quartile starts at the 3.84% level in the US 10-year yield and the average annual growth rate in total real investments (here we subtract inflation) in the subsequent year is 9.2%. This level is considerably higher that the third and second quartiles of 2.6% and 2.8% average annual growth rates. The first quartile splits at the 1.99% yield and in the low interest rate environment we measure subsequent growth of 5.9% on average. While these data points are not conclusive, and a proper study should broaden out the data analysis over a longer period and across more countries. But it is an interesting observation that since 2003 the highest growth in S&P 500 real investments has been during periods with the highest level of bond yields. So maybe the evidence is not that supportive that higher interest rates will kill the investment rate in the economy.

27_PG_3

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • 350x200 peter

    Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • 350x200 althea

    Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • 350x200 peter

    Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • 350x200 charu (1)

    FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • 350x200 ole

    Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.