Equity Duration: Measuring How Sensitive Stocks Are to Rates
Bonds have duration. So do stocks. Understanding which equities carry the most interest rate risk can save your portfolio in a rising rate environment.
When the 10-year Treasury yield moves, some stocks barely flinch while others crater. This sensitivity—how much a stock's price moves for each percentage point change in rates—is the equity's implicit "duration." Just as bond investors measure duration to understand rate risk, equity investors can too.
The concept is straightforward. A stock's value equals the present value of its future cash flows. When discount rates rise, future cash flows become less valuable. But not all cash flows are created equal. A company expected to generate most of its earnings 10 years from now will see its present value hit harder than one generating cash today.
This is why growth stocks fell harder than value stocks in 2022. When the 10-year yield jumped from 1.5% to 4.2%, high-duration assets got crushed. Long bonds (TLT) fell 30%. Nasdaq (QQQ) dropped 33%. Meanwhile, energy stocks—whose cash flows are tied to current commodity prices, not distant projections—gained 59%.
Measuring equity duration
We can estimate an equity's duration by regressing its monthly returns against changes in the 10-year yield. The resulting coefficient—the "rate beta"—tells us how sensitive the stock is to rate moves. A rate beta of -8 means the stock tends to fall 8% when rates rise 1 percentage point.
Here's what we find across major ETFs:
| ETF | Asset Class | Rate Beta | Correlation | Duration |
|---|---|---|---|---|
| TLT | Long Treasury Bonds | -11.70 | -0.66 | Very High |
| XLK | Technology | -8.01 | -0.20 | High |
| QQQ | Nasdaq 100 | -7.98 | -0.29 | High |
| XLC | Communications | -6.58 | -0.25 | High |
| XLRE | Real Estate | -5.90 | -0.23 | Moderate-High |
| XLY | Consumer Discretionary | -5.50 | -0.13 | Moderate-High |
| SPY | S&P 500 | -4.00 | -0.17 | Moderate |
| XLV | Health Care | -3.55 | -0.18 | Moderate |
| IWM | Small Caps | -2.77 | -0.09 | Low-Moderate |
| XLU | Utilities | -1.91 | -0.05 | Low |
| XLP | Consumer Staples | -1.20 | -0.07 | Low |
| XLI | Industrials | -0.51 | -0.02 | Very Low |
| XLF | Financials | +0.92 | +0.03 | Inverted |
| XLE | Energy | +8.34 | +0.16 | Inverted (High) |
The pattern is striking. Technology and long-duration growth (XLK, QQQ) carry rate betas of -8, almost as negative as bonds (TLT at -11.7). At the other extreme, energy (XLE) has a positive rate beta of +8.3—it benefits from rising rates. Financials (XLF) are mildly positive.
Energy correlates with rate increases because both are driven by inflation and growth. Strong economies push up both oil demand and interest rates. Financials benefit because banks earn more when rates rise, widening their net interest margins.
Individual stock duration
Within sectors, individual stocks vary significantly. High P/E growth stocks with distant profit horizons carry the most duration. Low P/E dividend payers with near-term cash flows carry the least.
High duration stocks (rate-sensitive)
| Symbol | Company | Sector | P/E | Mkt Cap ($B) | 1Y Return |
|---|---|---|---|---|---|
| DASH | DoorDash | Technology | 119.5 | 89.5 | +16.6% |
| PANW | Palo Alto Networks | Technology | 111.9 | 127.0 | -0.7% |
| INTU | Intuit | Technology | 104.4 | 152.5 | -9.7% |
| NOW | ServiceNow | Technology | 95.3 | 133.5 | -88.3% |
| CDNS | Cadence Design | Technology | 82.9 | 86.3 | +2.0% |
| AVGO | Broadcom | Technology | 73.9 | 1543.2 | +35.9% |
| APP | Applovin | Technology | 72.8 | 176.4 | +54.2% |
| WDAY | Workday | Technology | 63.4 | 49.5 | -24.9% |
| MPWR | Monolithic Power | Technology | 61.8 | 51.6 | +69.7% |
| AMD | AMD | Technology | 52.1 | 413.1 | +107.5% |
These stocks trade at P/E multiples of 50-120x. Their valuations depend heavily on earnings expected 5-10 years in the future. When discount rates rise, those distant earnings become worth substantially less today.
Low duration stocks (rate-insulated)
| Symbol | Company | Sector | P/E | Div Yield | 1Y Return |
|---|---|---|---|---|---|
| RIO | Rio Tinto | Basic Materials | 5.2 | 4.01% | +50.1% |
| WDS | Woodside Energy | Energy | 5.6 | 3.44% | +7.0% |
| BHP | BHP Group | Energy | 6.6 | 2.08% | +35.1% |
| MPLX | MPLX LP | Energy | 8.2 | 3.84% | +14.1% |
| MO | Altria | Consumer Staples | 11.7 | 2.87% | +24.8% |
| CQP | Cheniere Partners | Energy | 12.9 | 3.93% | -4.4% |
| HMC | Honda Motor | Industrials | 13.8 | 2.20% | +13.9% |
| LMT | Lockheed Martin | Industrials | 17.6 | 2.04% | +19.9% |
| DEO | Diageo | Consumer Staples | 23.8 | 4.10% | -20.7% |
These stocks trade at P/E multiples of 5-25x with dividend yields of 2-4%. Their valuations are anchored to current earnings and dividends, not speculative future growth. When rates rise, their near-term cash flows maintain value while high-duration competitors suffer.
Portfolio implications
Knowing your portfolio's duration exposure is essential when rates are moving. Consider two scenarios:
Rising rate environment: Underweight technology and REITs (high duration), overweight energy and financials (negative duration). This hedges against rate-induced valuation compression.
Falling rate environment: Overweight growth and long-duration assets. When rates decline, these benefit most from the expanding valuation multiples.
The current environment presents a nuanced picture. With 10-year yields at 4.19% and rate volatility low, the immediate pressure on high-duration stocks has eased. But if inflation resurfaces or the Fed is forced to tighten further, high P/E stocks remain vulnerable.
Key Takeaways
- Technology (XLK) rate beta: -8.01—almost as rate-sensitive as long bonds
- Energy (XLE) rate beta: +8.34—benefits from rising rates
- High P/E stocks carry more duration—DASH (P/E 120), PANW (112), NOW (95) are vulnerable
- Low P/E dividend payers are insulated—RIO (P/E 5.2, 4% yield), MPLX (8.2, 3.8%)
- Current environment: low rate volatility supports risk, but duration exposure should still be managed