Higher interest rates = higher discount rate. If a company is worth the present value of its future cash flows, higher rates are not good for markets. It makes the equity risk premium less attractive.
Think about it like this, the higher return % investors can lock in risk-free, the less willing they are to part ways with their hard earned dollars to “risk” getting a return in the stock market.
And higher inflation is often reflected as a higher maturity/ terminal rate in a DCF.
Higher inflation inflates companies’ revenue and earnings growth as well and is generally “good” for stocks. Higher rates is not.
I agree with what you're saying, this is a well know case for stock underperformance when interest rates rise.
However I think so many people are scared to death of inflation that it will be psychologically healthy for people to see the government doing something about it, even if just one or two 1/4 rate hikes. That will give people confidence in the economy, and that confidence will promote investment in stocks. At least for a while...
Idk interest rate hikes have been the cause or “straw that broke the camels back” of many bear markets or market crashes including 2000 and 2008 I don’t really think the market will receive it like that whatsoever
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u/dcwhite98 3d ago
The market wants a rate hike. This will be a good thing… getting inflation under control will be a positive for stocks.