European companies face costlier borrowing: profits are already under pressure, so why does Goldman Sachs favor quality stocks?
European companies’ interest burden has increased since 2022, reducing profits by more than 5%. Goldman Sachs believes financing pressure will widen the gap between companies, but healthy balance sheets and its expectation of an improving macroeconomic environment in 2027 should help limit systemic risk.
Original source：Goldman SachsFirst published on Unhidea：Original source date：
Key takeaway
Goldman Sachs believes rising debt costs are shifting from a drag on profits to a constraint on capital allocation. Cash generation, pricing power and refinancing maturities will determine the extent of divergence among European companies.
How much have financing conditions tightened?
Since the beginning of September 2026, euro investment-grade bond yields have risen about 30 basis points to 4.4%, while credit spreads have widened by 24 basis points to 117 basis points. High-yield bond yields have risen about 90 basis points to 7.0%, while spreads have widened by 94 basis points to 354 basis points. Borrowers with weaker credit profiles have faced a more pronounced increase in financing costs.
Goldman Sachs cites intensified competition for funding and renewed inflation pressure as drivers. AI capital expenditure is adding particularly to financing demand: the bank’s credit strategists expect bond issuance by major US cloud providers to rise from 250 billion US dollars in 2026 to 420 billion US dollars in 2027, and financing for global AI projects to rise from 150 billion US dollars to 300 billion US dollars.
This means technology companies are also becoming more reliant on external funding: major cloud providers’ operating cash flow is increasingly insufficient to cover capital expenditure. However, their leverage remains extremely low relative to the broader market, as does that of the European technology sector.
How do higher interest rates feed into profits and investment budgets?
Since 2022, refinancing yields have risen above the coupons on outstanding bonds, reversing the tailwind companies once enjoyed from refinancing debt at lower interest rates. European companies’ interest expenses as a share of sales have risen from 1.25% to 1.85%. Goldman Sachs estimates that this 60-basis-point drag on margins has reduced profits by more than 5% and squeezed available cash.
STOXX 600 companies’ debt has an average maturity of about seven years, but one quarter will be refinanced over the next two years and another quarter is floating-rate debt. Thus, about half of the debt could be affected relatively quickly by higher rates; the longer average maturity does not insulate companies from near-term pressure.
All else equal, Goldman Sachs estimates that each 100-basis-point rise in debt costs reduces STOXX 600 profits by about 3%. In practice, inflation accompanying higher interest rates also supports revenue, providing a partial offset. Management teams are placing greater emphasis on deleveraging, potentially leaving less funding for investment and shareholder returns.
Why does Goldman Sachs expect divergence but not a systemic credit event?
The direction of pressure is worsening: corporate leverage is rising and interest coverage is declining. But the starting point remains relatively healthy: corporate net debt-to-EBITDA ratios are at or below historical averages, household savings rates remain relatively high, and financial institutions’ balance sheets are also relatively sound.
Goldman Sachs economists expect falling commodity prices, easing inflation and interest rates, and stronger economic growth in 2027 to limit widespread balance-sheet pressure. Their view is therefore that constraints will intensify for some companies, rather than the European market as a whole facing a systemic threat.
Which companies are more vulnerable, and what cushion do earnings data provide?
Goldman Sachs favors quality companies with greater earnings visibility and resilience. Companies with weak cash generation, limited pricing power, near-term refinancing needs or substantial floating-rate debt are more vulnerable: interest rates raise underlying financing costs, while wider credit spreads further increase the burden of refinancing debt.
Slowing growth reinforces this preference. Analysts’ expectations for STOXX 600 earnings-per-share growth fall from 20.7% in 2026 to 8.8% in 2027; Goldman Sachs’ own top-down forecasts are lower, at 15% and 5%, respectively.
Earnings remain supported for now: companies that have reported third-quarter results account for about 20% of the market capitalization tracked. Equal-weighted average profits exceeded expectations by 1.8%, although the size of the beat was slightly below the historical average. Earnings-per-share expectations have been revised up 2.1% over the past month, but only 0.6% excluding the commodities sector, indicating a substantial contribution from commodities to the overall improvement.
