Rates Flat Or Higher For Longer Impact Chemical EPS, FCF Conversion & Multiples

Research evidence excerpt

Rates Flat Or Higher For Longer Impact Chemical EPS, FCF Conversion & Multiples

USA | Chemicals EquityJulyResearch13, 2026

Rates Flat Or Higher For Longer Impact

Chemical EPS, FCF Conversion & Multiples

Will the Fed focus in 2027 on aggregate or interest-rate sensitive demand?

Chemicals appear to largely discount the former: rates higher-for-longer,

delaying a durable goods recovery and increasing the risk for SMID-caps and

commodity chemicals. For this scenario, we recommend Buy-rated LIN, CTVA,

IFF and KWR. In the latter scenario, which would also likely surge the home

equity wealth effect, we recommend Buy-rated CE, HUN, EMN, MEOH, CBT, DCI

and AVNT.

Earnings Impact From The Cost Of Financing: The impact on earnings from the reset in corporate

borrowing costs since 2022 is still playing out because of how companies structured their balance

sheets. For roughly half of our coverage, refinancing existing debt at current levels would imply a

headwind equivalent to >1% of EBITDA.

Sensitivity To Higher Rates: At current rates, assuming a baseline of 5%-6% net income growth

supplemented by buybacks and M&A (300-500bps), DCF-based benchmarks for "ruler" stocks

support ~19.0x NTM EPS, for cyclical specialty chemicals to ~16x (~11x if a recession is viewed

as likely within 2-3 years but estimate cuts have not started), and for commodity chemicals 11-12x

(4x-5x if a recession appears likely near-term). The sector level warranted NTM P/E based on a

regression model calibrated to the 1980s-2000s would be 14x-15x, vs. the current 18.4x, and a

warranted relative multiple to the S&P 500 of 95%-100% depending on the oil price. We estimate

each 100bps increase in borrowing costs, if sustained, would cut EPS for most chemical companies

under coverage by 1%-3%.