Higher Rates Are Bad News For Stocks, But Especially Tech Stocks

Higher Rates Are Bad News For Stocks, But Especially Tech Stocks
Theodora Lee Joseph, CFA

over 1 year ago1 min

It’s that time again: interest rate decision time. . The Federal Reserve (the Fed) is widely expected to announce another hefty rate increase on Wednesday, bringing its key rate to about 4%. You can expect that this will be a painful announcement for stocks: after all, higher rates shrink the present value of a company’s cash flows, which dents its valuation.

But the pain isn’t equal for all stocks. High-growth stocks tend to suffer more in a rising rate environment than low-growth ones. Since these stocks derive most of their present value from future growth and cash flows, higher rates impact their share prices more. The chart above shows just that: at rates of 4% and above, the valuation impact on low-growth stocks (blue bars) and high-growth stocks (yellow bars) start to widen meaningfully. The implication is clear: if rates continue to increase, the hit on high-growth sectors like tech will intensify, and the tech selloff we’ve seen so far might only be the beginning.

Nonetheless, don’t be surprised if stocks rally Wednesday even if the Fed announces another big 0.75 percentage point rate hike. Near-term stock moves are often fueled by short-term drivers. Over the long term, however, the continued upward trajectory of interest rates will prove bad news for stocks – particularly high-growth stocks – so you might just want to be cautious about picking up any downtrodden tech stocks just yet…

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