Impact of Interest Rates on S&P 500 Stock Returns : A Comparative Analysis of Value and Growth Stocks

Blekinge Tekniska Högskola, Institutionen för industriell ekonomi 2024

Background The value investing strategy, based on the idea of buying stocks that appear undervalued according tometrics such as price-to-book (P/B) or price-to-earnings (P/E) ratios, has had mixed success over time. In particular, it was effective from 1963 to 1981, but has been less reliable since then, underperformingin the post-financial crisis period from 2007 to 2020 - a period where many studies proclaimed the "death of value investing". The variability in performance can be linked to changes in the risk-free rate, which was higher in the former period and low in the latter. Since stock price valuations are influenced by the risk-free rate through the discounted cash flow (DCF) model and the capital asset pricing model (CAPM), it's reasonable to connect the success and failure of the value strategy is due to the differences in the risk-free rate, based on the notion that growth and value stocks differ in the timing of their earnings and free cash flows, with growth stocks in the future and value stocks in the present and near future. With interest rates rising from 2020 onwards, this becomes even more relevant as the changing interest rate environment may lead to a re-pricing of assets. Purpose/Objectives This study examines the differential impact of interest rates on growth and value stocks’ returns. The investigation is based on a comprehensive literature review and analyzing how historical returns are affected by different measures of interest rates. Furthermore, the study aims to test these theoretical predictions against empirical data collected fromthe S&P 500, employing both inductive and deductive analytical methods to assess the accuracy and reliability of the theoretical models in predicting real-world outcomes. Using this methodological approach ensures that the conclusions drawn from the study are well-supported by data, providing meaningful insights into the interaction between interest rates and stock valuations. Investors with a nuanced und

Value investing; Interest rates; Stock returns; Panel data model; Economics; Nationalekonomi; Business Administration; Företagsekonomi; Student thesis; info:eu-repo/semantics/bachelorThesis; text

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