Recalibrating expectations

Sid Queler

May 19, 2022

Changing economic conditions may affect companies, profitability, and share price valuations.

It has been wrongly predicted many times, but this could be the year the bull market in bonds comes to an end. During the first quarter of 2022, the yield on benchmark 10-year United States Treasuries rose from 1.63% to 2.32%.1 The Federal Reserve (Fed) raised rates in March and is expected to do so several more times, although the Russian invasion of Ukraine has introduced a new element of uncertainty. As interest rates have risen, investors have been adjusting and readjusting their expectations for company earnings and share price valuations — and that has created significant market volatility.

Economic recovery and inflation have pushed interest rates higher

The US economy experienced a robust pandemic recovery. The labor market has been strong. Wages have been rising and, last year, the economy grew at the fastest rate in 40 years. The recovery was accompanied by inflation that was partially demand-driven and partially due to supply constraints, and consumer prices rose at a pace that was well above the Fed’s 2% target rate. By March 2022, inflation was 6.5% year over year.2

To bring inflation in line, the Fed began to implement less accommodative monetary policy. It stopped buying securities, began raising the target range for the federal funds rate, and shared plans for reducing its balance sheet.3

Ideally, the Fed will deliver a “soft landing,” meaning that demand for goods falls just enough to reduce inflation without the US entering a recession. It’s a tall order, though, because rising rates can adversely affect companies. Typically, higher interest rates:

  • Increase the cost of borrowing, which can reduce companies’ investment in equipment, technology, and property. It also can lower consumer demand as rates on loans and credit cards rise.

  • Lower companies’ net worth by reducing the value of future cash flows, increasing liabilities by making financing more expensive, and lowering sales if customers have less spendable income.

  • Make financing more difficult to attain if company balance sheets become less attractive and banks are less willing to provide loans. Financing also may become more expensive if investors demand higher interest rates on the bonds a company issues.

  • Affect profitability if companies cannot grow earnings quickly enough to offset the effects of rising rates.

Investors worry that the Fed could act too aggressively, and the economy will fall into recession. 

The war in Ukraine has created uncertainty

Russia’s invasion of Ukraine complicated the Fed’s decision-making process and deepened investor uncertainty. In addition to taking a heartbreaking human toll, the war has affected decision making at many multinational companies. Sanctions and public pressure have resulted in:

  • Oil giants ending partnerships with Russian companies
  • American logistics firms no longer making deliveries in the region
  • Shipping companies no longer sailing to the region
  • Consumer products companies pulling back
  • Retailers closing stores in Russia

As a result, expectations for companies’ growth and earnings are changing. The Fed must decide how these factors will affect the economy and its monetary policy decisions.

Rising energy and food costs are affecting economies and markets

The war also has driven the price of some commodities higher. Russia is a top producer of oil, natural gas, and metals. Ukraine is a top exporter of wheat, grains, and sunflower oil. Ukraine also has the infrastructure that supports Russian commodity exports. Already, we have seen reduced supplies pushing energy and food prices higher, which will improve some companies’ bottom lines and hurt others. 

High energy costs tend to slow economic growth, and that has created additional uncertainty around central bank policy. The Economist explained, “According to orthodoxy, rich-world central bankers should all but ignore supply shocks such as dearer energy. That is because their direct effect on inflation is only temporary. When policymakers ignore this rule of thumb, things usually go wrong.”4

It's going to be difficult for central banks to ignore supply shocks since inflation was already running high in many countries and many central banks were already planning to raise interest rates. While some may change course, the Fed is expected to continue to raise rates, albeit at a measured pace.

Tightening US monetary policy and war in Ukraine have deepened investor uncertainty. Factors are at play that may affect global economic growth, company performance and earnings, and share price valuations. Until we have greater clarity, markets are likely to remain volatile.

If you have questions or would like to discuss how the changing economic conditions may affect companies, contact me at or 617-531.6954.

Sid Queler is the chief growth officer, with more than 30 years of industry experience. In this role, he leads the firm’s business development team, setting strategies and practices that broaden relationships with individuals, families, foundations and endowments. Sid also shares economic and financial insights in his biweekly column, The Affluent Mind. 


[1] ‘Daily Treasury Par Yield Curve Rates.’ U.S. Department of the Treasury website. Cited March 18, 2022.
[2] “Consumer Price Index – March 2022.” Bureau of Labor Statistics. April 12, 2022. [Inflation reflects the core Consumer Price Index, which excludes food and energy prices.]
[3] Lorie K. Logan. “Federal Reserve Asset Purchases: The Pandemic Response and Considerations Ahead.” Federal Reserve Bank of New York. March 2, 2022. [Inflation reflects the Consumer Price Index, excluding food and energy.]
[4] “Central banks should ignore soaring energy costs.” The Economist. March 5, 2022.