Rising Rates Amplify Equity Market’s Haves, Have-Nots Divide

We might’ve entered dead horse-beating territory by now when it comes to documenting the disparity between how rising rates affect US large-caps and how less fortunate corporates are impacted.

Repetitive thought it is, it’s an important point. Both the US consumer and corporate America were insulated this cycle from Fed hikes. As a share of the total, variable-rate debt on household balance sheets is very low (even as credit card debt is above $1 trillion in absolute terms), and corporates that borrowed heavily in 2020 and 2021 locked in rock-bottom rates on cash piles which were later used to fund operations and generate interest income.

Seen through that lens, it’s no wonder the US economy is holding up so well after so much policy tightening: Both companies and their customers are shielded from rate increases.

But not all corporates are created equal, something SocGen’s Andrew Lapthorne has documented and illustrated several times over the past few months. On Monday, he returned to the topic.

“Gross interest costs are rising quicker for smaller companies than for the largest companies, in large part because smaller companies have more debt and a lot more of it is in floating rate instruments,” he wrote, adding that when you deduct interest income (i.e., to get companies’ net debt interest rate), the chasm between large and small is enormous.

The only quibble I have is that the spread is always very wide between large and small, so it’s not obvious the current situation is anomalous, at least in that regard.

In any event (and to reiterate the point above), this is pretty important, and particularly in the context of margins. Large companies are obviously more profitable, which amplifies and reinforces the interest cost disparity. “Net interest costs represent less than 6% of EBIT for the top 100 largest companies compare[d] to 28% of EBIT for the smallest,” Lapthorne went on.

Meanwhile, the situation could be exacerbated for smaller firms if taxes go from being a tailwind (i.e., lower over time) to a headwind (i.e., creeping up).

“Both lower taxes and interest rates have been a positive tailwind for profits for the last 20 years, a trend that is already turning into a considerable headwind for some and is likely to get worse going forward,” Lapthorne said.

From everyday people to corporate “citizens,” America is (and always will be) a land of haves and have-nots.


Speak your mind

This site uses Akismet to reduce spam. Learn how your comment data is processed.

3 thoughts on “Rising Rates Amplify Equity Market’s Haves, Have-Nots Divide

  1. I wonder if labor costs/rates have been similarly impacted — i.e., worse for the have-nots. But in all cases, it is likely another headwind in addition to interest and taxes.

    1. Over decades of helping small businesses (founded and helped run a small business support center for my university) small firms are generally forced to pay lower wages than area large firms. When there are one or more large firms in a given area, they are a constant magnet for the workers of smaller firms. We had three such firms in our area, employing some 15,000 workers. While not all the jobs at these places were choice, a large proportion of workers with any significant skills had resumes on deposit in the HR departments of one or more of these big guys and would move in a New York minute if given the chance. The big guys paid more and especially, they offered superior benefits. The latter area is the one most have nots can’t match.

  2. The ultimate split between haves and have nots is acess vs no access. That’s one reason I have fair sized positions in eight quality BDCs. The proportion of my capital they consume is about 5.5%. The proportion amount of my investment income (cash distributions) they provide is 12.5%. For many have nots these guys are the last resort. They can be expensive to use but they provide access others won’t. For my holdings the non-accrual rate is ~1.2% and losses are lower.

NEWSROOM crewneck & prints