Wall Street Fears What Higher Rates Will Do to Corporate America

Some of Wall Street’s biggest banks expect a lengthy period of higher interest rates to further pressure Corporate America’s profit engine, threatening equity gains as companies grapple with elevated financing costs and margin-shredding inflation.

While corporate earnings have been better than feared this season, Morgan Stanley and Bank of America Corp. strategists have warned that profit estimates will need to be cut much further before stocks can find a true low.

Now, strategists at Bank of America expect the Federal Reserve to raise rates by a half percentage point in September. A strong employment report for August, due this Friday, could even tip the balance in favor of a 75 basis point hike, they said.

“If achieving the dual mandate in pre-pandemic times required a ‘lower for longer’ policy rate, we expected the main message coming out of Jackson Hole to be that conditions now required ‘higher for longer’ policy rates,” Bank of America strategists wrote in a note. “The message from Jackson Hole met our expectations.”