Apr 10

How Do Higher Interest Rates Impact Stocks?

By Scott Aune, Investment Manager

It's commonly assumed that higher interest rates mean lower stock prices.

From an investor's perspective, many stocks pay dividends but the price of stocks can be much more volatile than the price of bonds. Bonds pay interest, but their prices are generally more stable than​ stocks. As bond interest rates increase, stock dividends may become less attractive since investors will prefer the higher income and greater price stability of bonds. Following this through to its conclusion, as interest rates rise and eclipse the rate of stock dividends, investors may increase their positions in bonds, causing the price of bonds to rise; and reduce their positions in stocks, causing the prices of stocks to fall.

From a business perspective, higher interest rates represent higher borrowing costs to companies, making it more expensive to do business, which may result in lower profit margins and therefore a lower stock price. 

Now that the Fed has begun raising interest rates, many investors are concerned with the impact rates have on stocks. Although higher rates are not necessarily good for stock prices, the good news is that rising interest rates aren't necessarily bad for stocks either. The conundrum lies in the fact that, in some situations — an expanding economy, for example — interest rates and stock prices can rise together. We are seeing this phenomenon now as the economy strengthens — and that's a good thing. 

The underlying message is that as the economy gains strength, increased consumer demand for goods and services may lead to more profitable companies and higher stock prices. In turn, companies will want to expand, purchase additional equipment, etc., increasing the demand for credit which results in higher interest rates. So, for a time, stock prices and interest rates can rise together.

The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.
Stock investing involves risks, including the loss of principal.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise, and bonds are subject to availability and change in price.
Author

Joseph Szadvari

Financial Advisor

Joseph Szadvari joined Northwest Financial Advisors (NWFA) as a Financial Advisor in August of 2025. He enjoys providing clients with a comprehensive range of wealth management advice and services carefully personalized to their individual needs and goals. He believes that it is profoundly important to connect with his clients as it better helps him guide his clients through their financial journey.

Joseph has 25 years of experience in the financial services business. Prior to joining NWFA, he was a Financial Advisor at PNC Investments. He was previously employed as an Investment Advisor at Dominion Financial Consultants and a Private Banker at PNC.

His industry credentials include Financial Industry Regulatory Authority (FINRA) SIE and Series 7, 6, 63 and 65 licenses.* He attended The Ohio State University before starting his career in the financial services industry.

Joseph lives in Stafford, Virginia, and is the father of two beautiful children. He is a member of the Rappahannock Area Foster Families Team (RAFFT), The Fredericksburg Area Museum and Cultural Center, Fraternal Order of Eagles and the Izaak Walton League of America.


*FINRA SIE, Series 7, 6 and 63 licenses held through LPL Financial. Series 65 license held through Northwest Financial Advisors.
Joseph Szadvari Financial Advisor

Financial Advisor

Joseph Szadvari

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