How Do Rising Interest Rates Affect the Stock Market?

Macro Guide, 2026

By Ken Chigbo, Founder, KenMacro, UK macro desk.

Find Ken on X @realkenchigbo · YouTube @Realkenchigbo · MACRO MASTERY Discord

Updated 2026-06-08

Channel one: the discount rate hits future earnings

A stock is worth the present value of the cash it pays you over time. When the rate you use to discount those future earnings rises, every pound of distant profit is worth less today. That is the mechanism behind the whole repricing. The longer the duration of the cash flows, the harder the hit, which is why high-growth and tech names take the most pain when yields climb. Their value sits in earnings years away, so a higher discount rate compresses the multiple sharply. Mature, cash-generative businesses pay you sooner, so they are less sensitive. On the desk we watch this duration split closely: when yields jump, the rate-sensitive end of the market leads the move down, and that tells you the repricing is mechanical, not a story about company fundamentals.

Channel two: borrowing costs squeeze earnings

Higher rates lift the cost of capital for companies and households alike. Firms refinancing debt or funding new projects pay more, which trims margins and slows investment. On the demand side, dearer mortgages, car loans and credit cards leave consumers with less to spend, so revenues soften across the cyclical parts of the market. This channel works with a lag, because debt rolls over gradually and households adjust spending over months rather than days. That delay is why the earnings damage often shows up well after the rate move itself. Highly leveraged businesses and rate-sensitive sectors like property and small caps feel it first. The desk treats this as the slow burn: the discount-rate hit is instant, but the margin and demand squeeze grinds through quarterly results, and that is where earnings disappointments tend to cluster.

Channel three: competition from cash and bonds

For years of near-zero rates, equities had no real rival, the era nicknamed there is no alternative. When cash and government bonds start paying a meaningful yield, that changes. Investors can earn a solid return with far less risk, so the premium they demand to hold shares instead has to reset higher. That is the equity risk premium widening, and it pulls valuations down across the board, not just in growth names. A money-market fund yielding four or five per cent is genuine competition for a stock market on a stretched multiple. The desk reads this as a gravitational pull: the higher the risk-free yield, the more equities have to justify themselves on earnings rather than on cheap money. It also explains why dividend-paying defensives can lag, since their income looks less special next to a safe bond.

It depends why rates are rising

This is the nuance most commentary skips. Rising yields are not one signal. If rates climb because the economy is genuinely strong and growth is accelerating, stocks can rally alongside them, because the earnings upgrade outweighs the discount-rate drag. The desk calls that a good rise. If yields instead push up on stubborn inflation, a swelling term premium or fiscal stress over government borrowing, that is a bad rise, and equities tend to struggle because there is no growth offset, only a higher cost of money. The same headline move in the ten-year yield can therefore be bullish or bearish depending entirely on the driver. Before you react to a yield spike, work out what is behind it: a hot growth print is one thing, a failed bond auction or a hot inflation surprise is another entirely.

Speed beats level, and the rotation it triggers

Markets adapt to a high level of rates over time. What they cannot digest is a fast move. A sharp, disorderly spike in yields is what cracks equities, because it forces an abrupt repricing before earnings or positioning can adjust. A slow grind to the same level is far easier to absorb. So the desk watches the rate of change in yields, not just the number on the screen. Rising rates also drive a rotation under the surface: value, financials and banks tend to outperform, since higher rates lift their margins, while long-duration growth and tech lag. That growth-to-value rotation is often where the real money is made, even in a flat index. Reading the speed of the move and the rotation it sets off matters more than calling the index direction.

The desk’s checklist

1. Identify the driver behind the move. Before reacting, work out why yields are rising. Strong growth data is a different signal from a hot inflation print or fiscal stress. A growth-led rise can support stocks, an inflation-led or term-premium-led rise usually does not.
2. Measure the speed, not just the level. Track the rate of change in the ten-year yield over days, not the absolute number. Fast, disorderly spikes are what damage equities. A slow grind to the same level is far easier for the market to absorb.
3. Map exposure by duration. Sort your holdings by how far out their cash flows sit. Long-duration growth and tech are most exposed to a higher discount rate. Cash-generative, mature businesses are less sensitive and tend to hold up better.
4. Watch the equity risk premium. Compare the market earnings yield to the risk-free bond yield. When cash and bonds pay well, equities must offer more to compete. A thin premium leaves valuations vulnerable to further repricing.
5. Position for the rotation. Rising rates tend to favour value and financials over growth and tech. Tilt towards the sectors that benefit from higher yields, such as banks, and lighten the most rate-sensitive long-duration names.
6. Anchor your view around the central bank. Yields and stocks react hardest around policy meetings and key data. Build your plan around the Fed and the Bank of England calendar, and treat the moves in yields into and out of those events as your signal.

Frequently asked

Do rising interest rates always make the stock market fall?

No. The general pull is downward through the discount rate, cost of capital and competition from bonds, but it depends on why rates are rising. If yields climb on strong growth, the earnings upgrade can outweigh the drag and stocks rise alongside them. If they rise on inflation, term premium or fiscal stress, that is far worse for equities, because there is no growth offset.

Why do tech and growth stocks fall hardest when rates rise?

Their value sits in earnings far in the future, so they are long-duration. A higher discount rate compresses the present value of distant cash flows more than near-term ones, so the multiple gets hit hardest. Mature, cash-generative businesses pay you sooner and are less sensitive, which is why the rate-sensitive growth end of the market usually leads a sell-off on a yield spike.

What matters more, the level of rates or the speed of the move?

The speed. Markets adapt to a high level of rates over time, but a fast, disorderly spike forces an abrupt repricing before earnings and positioning can adjust, and that is what cracks equities. A slow grind to the same level is far easier to absorb. The desk tracks the rate of change in yields, not just the number on the screen.

What is the equity risk premium and why does it matter here?

It is the extra return investors demand to hold shares instead of safe bonds. When rates were near zero, equities had no real rival. Once cash and bonds pay a meaningful yield, investors can earn a solid return with less risk, so the premium has to reset higher. That widening pulls equity valuations down across the board, not just in growth names.

Which sectors benefit when interest rates rise?

Value and financials tend to outperform. Banks in particular benefit because higher rates can widen their lending margins. Energy and other cyclicals can hold up if rates are rising on strong growth. The losers are usually long-duration growth and tech, plus rate-sensitive areas like property and highly leveraged businesses that face steeper borrowing costs.

How are bond yields and stock prices connected?

Bond yields set the risk-free rate that equities are valued against, so they feed straight into the discount rate and the equity risk premium. Real yields, which strip out inflation, matter most for long-duration stocks. When yields rise sharply, the repricing flows mechanically into equity multiples, which is why the desk watches the bond market as the lead signal for stocks.

Educational analysis only, not financial advice. KenMacro has commercial partnerships with some firms referenced and may earn a commission if you open an account, at no cost to you. Manage risk against your own circumstances.