How interest rates affect stocks: discount rates and equity duration

Interest rates are the price of time. They set what a dollar received next year, or in twenty years, is worth today, and that makes them part of the value of every stock. When the yield on US Treasury bonds rises, investors can earn more without taking stock-market risk, and every future dollar of corporate profit is worth less in today's money. Stock prices usually have to adjust.

This guide explains the mechanics: how the discount rate enters a stock's value, why companies whose profits lie far in the future are the most sensitive (their equity duration is longer), and how rates reach stocks through the real economy as well. It then checks the ideas against five years of Finabase data on the 10-year Treasury yield, the Nasdaq-100, the S&P 500, and growth and value funds, including the 2022 rate shock and the 2026 episode in which yields rose and stocks rose anyway.

Which interest rates matter

"Interest rates" covers several different numbers, and they matter to stocks in different ways:

• The federal funds rate. The overnight rate banks charge each other, which the Federal Reserve's FOMC steers by setting a target range (federal funds rate). It anchors short-term rates and borrowing costs throughout the economy.
• Treasury yields. What the US government pays to borrow for 3 months to 30 years (Treasury yield). The 10-year yield is the most watched benchmark for valuing long-lived assets like stocks. Finabase charts it under the symbol ^TNX.
• Real yields. Treasury yields minus expected inflation, observable in the yields on inflation-protected TIPS. Real yields matter most for valuation, because profits tend to rise with inflation over time (real return).
• Corporate borrowing rates. Treasury yields plus a credit spread. These set what companies actually pay on new debt.

The Fed controls the short end directly. Longer yields are set in the bond market and reflect expected future short rates, expected inflation and a term premium for the risk of holding long bonds. That is why the 10-year yield can rise even while the Fed is cutting, as it did in late 2024, when the 10-year rose from about 3.6% to about 4.7% in the four months after the Fed's first cut in September.

The discount-rate channel

A share is a claim on cash flows stretching decades ahead. To value it, investors convert each future dollar into today's dollars by dividing by (1 + required return) for each year of waiting: the logic of present value and discounted cash flow. The required return has two parts:

When the Treasury yield rises and the risk premium stays the same, the required return rises, every term in the sum shrinks, and the price falls. The size of the fall depends on when the cash arrives. A dollar due next year loses about 1% of its present value when the discount rate rises one point. A dollar due in 20 years loses about 17%.

Equity duration: why growth stocks are more rate-sensitive

Bond investors measure rate sensitivity with duration: roughly, the percentage a bond's price changes for a one-point change in its yield. The same idea applies to stocks. A company that pays most of its value out soon has a short equity duration; a company whose profits are expected to arrive mostly in the distant future has a long one.

The constant-growth (Gordon) model makes this concrete. If a company pays a cash flow D next year that grows at rate g forever, and investors require return r:

The model exaggerates in one way: in reality a rate rise often comes with higher inflation and nominal growth, which partly offsets it. But the direction is robust. The more a stock's value depends on distant profits, the more a change in the discount rate moves it. That is why unprofitable, fast-growing companies tend to be the most rate-sensitive of all, and why growth and value stocks often diverge when rates move.

The other channels

Rates also reach stocks through the businesses themselves:

• Borrowing costs. Higher rates raise interest expense for companies with floating-rate or maturing debt, cutting profits. Highly indebted companies, real estate and utilities feel this most (interest coverage).
• Demand. Higher mortgage, auto and business loan rates slow spending on houses, cars and equipment. That is the point of tighter monetary policy, and it shows up in the sales of cyclical companies.
• Bank margins. Banks can earn more when rates rise, especially when long rates rise more than short rates, though higher rates can also raise loan losses.
• Competition from bonds and cash. When Treasury bills and money-market funds pay 5%, stocks have to offer more to attract money. A simple comparison is the stock market's earnings yield (earnings ÷ price, the inverse of the P/E) against bond yields. It is a rough guide, not a rule, because stock earnings grow and bond coupons don't.
• The dollar. Higher US rates tend to strengthen the dollar, which lowers the dollar value of US companies' foreign sales.

Finally, rates change because the economy changes. If yields rise because growth is strong, earnings may rise enough to offset the higher discount rate. If they rise because inflation is stubborn and the Fed must squeeze the economy, both channels hurt. Why rates move matters as much as how far.

What the data show: 2021 to 2026

2022: the rate shock

At the end of 2021 the 10-year yield stood at about 1.5% (1.48% on our last weekly close of the year), and the Fed's target range was still 0% to 0.25%. Inflation had surged, and through 2022 the Fed raised its target in a series of increases that took it to 4.25% to 4.50% by December, and to 5.25% to 5.50% by July 2023. The 10-year yield ended 2022 at 3.86%, after a weekly closing high of 4.23% in late October.

Stocks fell hard, and in the order the duration argument predicts:

The long-duration assets, growth stocks and long Treasury bonds, lost about a third of their value. Value stocks, with more of their cash flows near-term and heavier weights in energy and financials (which benefited from high oil prices and higher rates), lost under 5%. From its weekly closing peak in November 2021 to its low in October 2022, QQQ fell 35.5%.

Utilities are a useful exception. They are often called "bond proxies" and usually suffer when yields rise, but in 2022 their steady demand made them a refuge from recession fears, and XLU ended the year nearly flat. Rate sensitivity is a tendency, not a law.

2023: rates flat, stocks up

In 2023 the 10-year yield ended almost exactly where it started (3.86% to 3.85%) after a round trip to a weekly close of 4.85% in October. QQQ rose 53.8% and SPY 24.3% in price. Little of that came from rates; it came from earnings expectations, above all for the largest technology companies, and from a falling risk premium as recession fears faded.

2026: rates up, stocks up

In 2026 the 10-year yield rose from 4.13% at the end of 2025 to a weekly close of 5.27% in early October, its highest in the five-year window, and stood at 4.99% on October 29. Over the same period, through late October, QQQ gained 16.7% and SPY 12.6%. The discount rate rose; expected earnings rose faster. This is the most important caution in this guide: a rising yield is a headwind for valuations, not a guarantee that prices fall.

Week to week, the link is weak

Over the 249 weeks in our sample, the correlation between the weekly change in the 10-year yield and QQQ's weekly return was −0.10, and for SPY −0.13. The negative sign is what theory predicts, but the size is small: in any given week, rate moves explained only a sliver of stock moves. The effect of rates shows up in large, sustained changes in their level, like 2022's, rather than in daily wiggles.

Pitfalls in reading rates

• Assuming rate cuts are always good for stocks. Cuts made because a recession is arriving can come with falling earnings that outweigh the lower discount rate.
• Watching the Fed and ignoring the 10-year. Long yields, not the overnight rate, drive valuation, and they don't always move with the Fed.
• Ignoring why yields moved. Yields rising on strong growth and yields rising on stubborn inflation have very different effects on profits.
• Treating "growth" and "value" as fixed labels. A fund's rate sensitivity depends on what it holds today. Index sector weights change (see Stock market sectors and industries: GICS and sector ETFs explained).
• Overfitting one episode. 2022 fit the duration story neatly; 2026 did not. Both are real.

Rate sensitivity at a glance

These are tendencies over many episodes, not rules, and any one year can break them. The sector guide shows how sectors actually behaved from 2022 to 2026.

How Finabase shows rates and stocks

• Treasury yields. The Treasury page lists yields across the curve, from the 1-month bill to the 30-year bond, with today's change and moves over longer periods, so you can see whether the yield curve is steepening or inverted.
• The 10-year yield chart. ^TNX charts the 10-year yield like any stock. Add QQQ or SPY as a comparison series on the chart to see the two together, as in the figure above.
• Sectors and style. The sector page shows each S&P 500 sector's return over a day, week, month, quarter, half year, year and year to date. Rate-sensitive groups such as utilities and real estate have their own pages.
• Macro news. Fed decisions and inflation data arrive in the news feed.

Frequently asked questions

Why do stocks fall when interest rates rise?

Because a higher interest rate raises the return investors require from stocks, which lowers the present value of companies' future profits, and because higher borrowing costs can slow the economy and squeeze profits. Stocks don't always fall, though: if earnings grow fast enough, prices can rise along with rates, as they did in 2026.

Which stocks are most sensitive to interest rates?

Companies whose value depends on profits far in the future, such as fast-growing technology and unprofitable companies, plus businesses that borrow heavily or compete with bonds for income investors, such as real estate and utilities. In 2022 the growth-heavy QQQ fell 33.1% in price while the value fund VTV fell 4.6%.

Do rate cuts make stocks go up?

Often, but not reliably. Cuts lower the discount rate, but the Fed usually cuts because the economy is weakening. If earnings fall, stocks can fall through a cutting cycle.

What is equity duration?

A stock's sensitivity to changes in the discount rate, by analogy with bond duration. In the constant-growth model it is roughly 1 ÷ (required return − growth rate), so a stock priced on fast, long-lasting growth has a long duration and reacts strongly to rate changes.

Is the 10-year Treasury yield the right rate to watch?

It is the most common benchmark for valuing long-lived assets, and it moved closely with growth stock valuations in 2022. Real (inflation-adjusted) yields arguably matter more for valuation, and short rates matter more for borrowing costs and cash alternatives.

Summary

Interest rates enter a stock's price through the discount rate: the higher the risk-free yield, the higher the return investors require and the lower the present value of future profits. Stocks whose value lies furthest in the future have the longest equity duration and feel it most, which is why growth funds and long Treasury bonds both lost about a third in 2022 while value stocks lost under 5%. Rates also work through borrowing costs, demand, bank margins and competition from bonds. But rates are one input among several. When the 10-year yield was flat in 2023 stocks soared, and when it rose to about 5% in 2026 stocks rose too, because earnings grew. The lasting effect of rates shows in big, sustained changes in their level, not in weekly moves.