What happens to stocks when interest rates rise

A rate rise can take a third off a share price without a single thing changing at the company. Here is exactly why, which businesses are most exposed, which ones benefit, and why the right response is usually a wider margin of safety rather than a forecast.

By Nathan Wickham-Hurd · Founder, Oak Growth · First-class Economics & Finance, MBA · Last reviewed August 2026

Context, August 2026. The Federal Reserve has held rates steady, and unusually for recent years markets have been pricing the possibility of a rate rise rather than a cut, with inflation still running well above target. That reverses the assumption most valuation models built in over the last decade. Market conditions change; the framework below is meant to outlast them.

The mechanism, in one line

A share is worth the cash the business will produce, discounted back to today. The interest rate is the discount. Raise it and every future pound is worth less now, so the value of the business falls — before its trading has changed at all.

Value = future cash flows ÷ (1 + discount rate)^years

That is the whole of it. Everything else is a consequence.

Why growth companies fall hardest

Not all shares are equally sensitive, and the reason is timing. A mature business generating steady cash now has most of its value in near-term flows, which are barely affected by discounting. A company whose profits arrive mostly in years seven to twenty has almost all of its value in the far future, where a higher discount rate compounds against it.

£100 received in	at 5%	at 8%	Change
1 year	£95	£93	−2%
5 years	£78	£68	−13%
10 years	£61	£46	−25%
20 years	£38	£21	−44%

This is why a rate move that changes nothing about a company's products can take a third off the share price of a long-duration growth stock while a utility barely moves. It is arithmetic, not sentiment.

The second effect people forget

Rates don't only change the discount — they change the cash flows too, and often in the opposite direction to what you'd assume.

Debt costs more

Companies refinancing into higher rates see interest expense rise and free cash flow fall. Check the maturity profile: a business with debt due in the next two years is exposed in a way one that termed out its borrowing at low rates is not. See debt to equity.

Some businesses earn more

Banks and insurers generally benefit from higher rates through wider net interest margins and better returns on their float. Companies sitting on large net cash balances earn more on it. Higher rates are not uniformly bad news at company level.

Demand cools

Housebuilders, car makers, anything sold on credit and anything discretionary sees volumes fall as borrowing costs bite. That is a cash flow effect, not a discounting one, and it hits the numerator of the equation above.

The hurdle for owning shares at all rises

When cash and government bonds pay a real return, equities have to compete. That compresses the multiple investors will pay for the whole market, independent of any individual company.

What a value investor actually does about it

Not much, and deliberately. You can't forecast the path of rates — nor can the people who do it professionally. What you can do is use a discount rate you'd be comfortable with in a range of environments rather than the lowest one you can justify, insist on a margin of safety wide enough to absorb being wrong about rates, and check debt maturities before assuming a leveraged business survives a higher-for-longer scenario.

Higher rates are also the environment in which quality gets mispriced. Indiscriminate selling of long-duration assets sweeps up businesses that fund themselves internally and don't need the debt markets at all — which is where the opportunity tends to sit.

See what changes when the discount rate moves

Oak Growth publishes an estimated intrinsic value and margin of safety for roughly 1,000 companies across nine markets, alongside the debt and cash flow checks that decide who copes with higher rates.

Explore Oak Growth

Common questions

What happens to share prices when interest rates rise?

Prices generally fall, because future cash flows are discounted at a higher rate and are therefore worth less today. Companies whose profits arrive far in the future fall hardest, while businesses generating cash now, and lenders who earn more on higher rates, are less affected or can benefit.

Why do growth stocks fall more than value stocks when rates rise?

Because of timing. Most of a growth company's value sits in cash flows many years out, where a higher discount rate compounds against it. A pound received in twenty years loses well over 40% of its present value when the discount rate moves from 5% to 8%, while a pound received next year loses about 2%.

Should I change my investments when interest rates change?

Rate paths are not reliably forecastable, so building a portfolio around a prediction is risky. A more durable approach is to use a discount rate that holds up across environments, demand a wide margin of safety, and check whether the companies you own have debt maturing soon at rates far above what they currently pay.

Do higher interest rates lower a company's intrinsic value?

Yes, in two ways. The discount rate applied to future cash flows rises, which mechanically reduces present value, and for indebted companies the cash flows themselves shrink as interest costs rise. Businesses with net cash or rate-linked earnings can see the opposite effect.

Also see: Weighted average cost of capital → · How to calculate intrinsic value → · Margin of safety →