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Investors should focus on stocks with strong balance sheets as these companies tend to be more resilient against high interest rates, according to Goldman Sachs. “Amid higher rates, we expect investors will continue to focus on balance sheet strength and avoid companies that are most vulnerable to increased borrow costs,” David Kostin, Goldman’s chief U.S. equity strategist, said in a note to clients. Bond yields have been surging lately as the Federal Reserve signaled higher rates for longer in its inflation fight. The benchmark 10-year rate briefly topped the key 5% threshold Monday. Higher rates make it more expensive to borrow, and they effectively lower the present value of any future earnings. In the face of a sharp rise in rates, businesses with high debt loads could have a harder time earning enough profits to justify stock valuations. Stocks with strong balance sheets have outperformed those with weak ones by 4 percentage points since the start of September, Goldman said. Companies with solid balance sheets that are well-positioned for the higher rate regime included a slew of Big Tech names such as Alphabet, Meta , Netflix and Nvidia . There are also several consumer names including Colgate-Palmolive , Costco and Chipotle Mexican Grill . “For companies with strong balance sheets, we expect investors will reward those firms returning cash to shareholders and will remain skeptical of companies making large capex investments at this stage of the cycle,” Kostin said. Meanwhile, investors are rotating away from stocks perceived to be vulnerable to the higher rate backdrop, including those with levered balance sheets, Goldman said. Companies in vulnerable positions included many travel names, such as American Airlines , Carnival, Caesars Entertainment and Delta Air Lines. — CNBC’s Michael Bloom contributed reporting.
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