1. What Are Interest Rates?
At the center of the financial system sits a central bank — such as the Federal Reserve in the U.S. — which sets a benchmark interest rate. That rate ripples out to influence borrowing costs across the entire economy, from mortgages to corporate loans.
Central banks raise rates to cool inflation and an overheating economy, and cut them to stimulate growth. Because these decisions affect every business and investor, they are among the most watched events in markets.
2. Rates and Stock Valuations
A stock is worth the value of its future profits, translated into today's dollars. That translation uses a discount rate tied to interest rates. When rates rise, future profits are worth less today — and stock valuations fall.
The mechanism: Higher rates mean a dollar earned years from now is worth less now. This mathematically compresses valuations, which is why markets often drop when rate hikes are expected. See our price drivers guide.
3. Why Growth Stocks Suffer Most
Growth companies earn most of their profits far in the future. Because rising rates hit distant earnings hardest, high-growth, high-valuation stocks are the most rate-sensitive.
Value stocks and companies with steady current profits tend to hold up better when rates climb — one reason value often outperforms growth in rising-rate environments, as covered in our growth vs. value guide.
4. Bonds Start to Compete
When rates rise, safer investments like government bonds and savings accounts start paying more attractive yields. Suddenly, investors don't need to take stock-market risk to earn a decent return.
The pull: As "risk-free" yields climb, some money flows out of stocks and into bonds, adding downward pressure on share prices. When rates are near zero, the opposite happens — investors are pushed toward stocks in search of returns.
5. The Business Impact
Rates don't just affect valuations on paper — they change company economics:
- •Higher borrowing costs squeeze profits, especially for indebted companies.
- •Slower consumer spending as mortgages and loans get pricier.
- •Reduced expansion as businesses delay borrowing to invest.
- •Currency effects — higher rates can strengthen a currency, pressuring exporters, per our currency guide.
6. Watching Rates on WIT
Rate expectations move the whole market, and WIT helps you track the fallout:
- Follow market news for central-bank decisions and rate commentary.
- Watch how sectors react on the dashboard — rate-sensitive groups often move first.
- Note growth vs. value rotation as rate expectations shift.