Potential Lower Stock Market Returns
The stock market might seem like it has a mind of its own, but valuations in the market depend to a large degree on outside economic forces. When interest rates rise, it’s often a negative for the market for a few reasons.
First, higher rates mean that the companies in the stock market have to pay more in interest expense, which could reduce their earnings. As earnings are one of the primary drivers of stock market prices, lower earnings often translate into lower stock prices.
Also, higher rates on other investments such as bonds, savings accounts and CDs provide competition for investment dollars that might otherwise go into the stock market. In any given year, the stock market might be up or down in value by 10% or more, with prices changing constantly and sometimes dramatically. But if investors can earn, say, 6% on a totally risk-free CD instead of a stock, many will prefer that choice.
In these two ways, higher rates can hurt stock market valuations.
