How Do Interest Rates Affect Stock Prices?
Interest rates affect stock prices mainly by changing what future profits are worth today: a higher rate lowers the value of cash a company will earn years from now, and it gives investors a better alternative in bonds. In theory, higher rates push prices down.
In the data the link is far looser. Across 68 calendar years since 1958, the correlation between the change in the 10-year yield and the S&P 500's price change is -0.07. Rates and stocks both respond to the economy, and that muddies the signal.
How do higher interest rates lower the value of a stock?
Four mechanisms are at work, and they do not act at the same speed.
- The discount rate. A discounted cash flow (DCF) turns future cash into today's value using a required return that starts from the risk-free rate. See discount rate.
- Competition from bonds. A Treasury at 4.98% is a safe alternative to stock earnings at 3.87%, a gap of -1.11 points (stocks vs bonds). Today's yield curve shows where bond yields sit, and the national debt page shows how much interest the Treasury pays on what it owes.
- Borrowing cost. A company that refinances debt at a higher rate keeps less profit. See interest coverage.
- Demand. Higher rates raise the cost of mortgages and loans, which can slow spending and sales.
How much can the discount rate change a valuation?
An illustration with made-up numbers, not a real company: a business earns $100 of free cash flow that grows 2.5% a year forever. At a 10% required return it is worth $102.5 ÷ 0.075 = $1,367. If the required return falls to 8%, it is worth $102.5 ÷ 0.055 = $1,864, 36% more, with no change in the business.
The same math runs in reverse when rates rise. Try it on the discount rate calculator, which shows how one input moves a fair-value estimate. To see what growth a share price already assumes at a given rate, see what a reverse DCF is.
Are growth stocks more sensitive to interest rates than value stocks?
In theory, yes. A growth company's value rests on profits far in the future, and a higher discount rate shrinks distant cash more than near cash. A company paying out cash today is less exposed. This is a property of the math, not a measured result on this site's data, so treat it as a reason to look, not a rule.
What does the data say about rising rates and stock returns?
Grouping every calendar year from 1958 to 2025 by how much the 10-year Treasury yield moved from December to December, and looking at the S&P 500's price change in the same year:
| 10-year yield change | Years | Average stock change | Range | Years up |
|---|---|---|---|---|
| Rose more than 1 point | 11 | +8.5% | -16.3% to +27.1% | 7 of 11 |
| Rose 0 to 1 point | 27 | +9.6% | -29.2% to +32.6% | 19 of 27 |
| Fell 0 to 1 point | 18 | +9.7% | -14.0% to +29.5% | 15 of 18 |
| Fell more than 1 point | 12 | +7.6% | -40.7% to +35.0% | 8 of 12 |
All 68 years averaged +9.1%. Years of big rate rises averaged about the same as years of falls, and the worst single year (-40.7%, 2008) came when yields fell. Price only, no dividends. Yield: FRED 10-year Treasury, monthly; stocks: the S&P 500 monthly price from multpl.com behind the equity risk premium page, both through September 2026.
Averages hide wide ranges: every group contains both strong and negative years (see the table).
Why is the link between rates and stocks so loose?
Rates and stocks both respond to the economy and to inflation. A recession cuts rates and profits at the same time; a boom lifts both. The biggest rate rises were mixed: 1969 (+1.62 points, stocks -14.5%), 1994 (+2.04, -2.3%) and 2022 (+2.15, -16.3%) fell, but 1980 (+2.45, +23.8%) and 2009 (+1.17, +26.5%) did not.
The same applies now. From December 2025 to September 2026 the 10-year yield rose from 4.14% to 4.99% while the index gained about 12%. Starting valuation matters too: the market's P/E is 25.9, a level where each point of yield counts for more. For the recession link, see whether an inverted yield curve predicts a recession, and for the gap between rates and inflation see real interest rates.
Interest rates and stocks FAQ
Do stocks always fall when interest rates rise?
No. In the 11 calendar years since 1958 when the 10-year yield rose more than 1 point, the S&P 500 fell in 4 and rose in 7, averaging +8.5%. From December 2025 to September 2026 the yield rose from 4.14% to 4.99% while the index rose about 12%.
Why do growth stocks react more to interest rates?
Most of a growth company's value sits in profits far in the future, and a higher discount rate shrinks distant cash flows more than near ones. A company paying cash now is less sensitive.
Do falling rates always help stocks?
No. In the 12 years since 1958 when the 10-year yield fell more than 1 point, stocks averaged +7.6% but ranged from -40.7% (2008) to +35.0% (1995). Rates often fall because the economy is weakening.
What is the discount rate in a DCF?
The yearly return you require, used to turn future cash flows into a value today. It usually starts from the risk-free rate, so a higher Treasury yield tends to raise it.
Do the Fed's rate decisions or the 10-year yield matter more?
The 10-year yield sets the discount rate most valuations use, and the Fed's policy rate mainly moves short rates. The two can move in different directions, as in the yield curve.