General Stock Investment Strategies/Interest Rates & Stock Prices



Why does raising the interest rate by the Federal Reserve have a negative effect on stock prices?

I thank you for your reply.

Hi Kenneth,

Interest rates are one factor that impacts stock prices. It is certainly not the most important factor, which would be earnings. The present value (current price) of any investment including a stock can be determined by discounting its future cash flows to the present by using a model. The way we discount future cash flows back to their present value is by using an interest rate.  If you raise the interest rate, the present value of the future cash flows will be lower.  Another way to look at it is if rates increase, the cost of borrowing will be higher (more costly) for companies and as a result, expenses will rise and earnings may fall.  Lower earnings would negatively impact stock prices.

I hope this helps.

General Stock Investment Strategies

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Michael Weiss, CFA


I can answer most questions about stock investment strategies, especially those related to value and growth


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