How do higher interest rates typically impact stock performance?

Higher interest rates typically exert pressure on stock prices for several reasons related to their influence on the cost of borrowing and overall economic activity. When interest rates rise, it becomes more expensive for companies to borrow money for expansion, operational costs, or capital investments, which can lead to reduced profits. Investors may respond to these conditions by adjusting their expectations for future earnings, often resulting in downward pressure on stock prices.

Additionally, higher interest rates can lead to increased yields on fixed-income investments such as bonds, making them more attractive to investors compared to stocks. As a result, capital may flow out of equities into safer, interest-bearing investments, which can further negatively impact stock performance. The overall economic environment may also slow down as consumer borrowing increases in cost, potentially leading to reduced consumer spending and lower corporate revenues.

These dynamics create a scenario in which higher interest rates can indeed have a negative impact on stock prices, reflecting the interconnectedness of interest rates and equity valuations.