Equity Duration as a Determinant of Differences in Interest Rate Sensitivity between Growth Stocks and Defensive-Sector Stocks

Abstract

The study examines why growth stocks and defensive-sector stocks respond with different force to the same movement in interest rates. The explanation rests on equity duration, a measure that extends bond duration to equity securities and captures how far into the future a firm’s expected cash flows are located. The analysis proceeds from the discounted cash flow model to the Gordon growth representation, in which duration equals the reciprocal of the spread between the required return and the long-run growth rate, and then to the multi-period implied duration used in the accounting and asset-pricing literature. A comparison matrix places information technology and communication services on one side and utilities, consumer staples, and health care on the other, and evaluates eight parameters that lengthen or shorten duration. The results show that the sensitivity gap follows from the timing of cash flows: firms whose value is concentrated in distant periods and in terminal value carry long duration and lose more value per unit increase in the discount rate. The reciprocal form of duration also explains why the exit from near-zero rates in 2022 and 2023 led to a disproportionate repricing of long-duration equities. The practical conclusion is that the interest rate exposure of an equity portfolio should be assessed through the cash flow structure of its holdings, since a historical beta estimated in one rate regime misstates the exposure that appears when the regime changes.