Macro context
How interest rates affect stocks
The channels through which interest rates reach a company's value: discount rates, interest expense, bank margins and capital-intensive sectors — and where in a 10-K each company discloses its own rate sensitivity.
The discount-rate channel
A share is a claim on future cash flows, and future cash is worth less today when rates are higher. A higher risk-free rate — usually proxied by the 10-year Treasury yield — raises the rate used to discount those flows and lowers their present value.
The effect is larger the further out the cash flows sit. A company whose value depends on profits many years away is more sensitive to a change in discount rates than one that earns most of its value in the near term, which is why rate moves often hit long-duration growth stocks hardest.
The earnings channel
Rates also reach the income statement. Companies with floating-rate debt, or with fixed-rate debt that matures and must be refinanced, pay more interest when rates rise. Interest expense sits below operating income, so the same operating business can report lower net income.
Banks work the other way round: their net interest income is the spread between what they earn on loans and securities and what they pay on deposits and borrowings. How that spread responds to a change in rates depends on how quickly each side reprices.
The sectors most often called rate-sensitive
Real estate investment trusts and utilities are capital-intensive and financed heavily with debt, and their dividends are often compared with Treasury yields as income alternatives. Homebuilders depend on mortgage rates, which follow the 10-year Treasury.
These are tendencies, not rules. Each company's exposure depends on its own debt maturities, hedges and pricing power, which is why the filing matters more than the sector label.
Where a company discloses its own rate sensitivity
Every 10-K includes Item 7A, "Quantitative and Qualitative Disclosures About Market Risk", where companies describe their exposure to interest rates — often as the estimated effect of a 100 basis-point change on interest expense or the fair value of debt.
The debt footnote lists fixed and floating borrowings and when they mature, which shows when higher rates will reach the income statement. The interest expense line, followed over several years on a company's financials page, shows whether it already has.
Common questions
Why do stocks often fall when interest rates rise?
Higher rates raise the rate used to discount future cash flows, which lowers their present value, and they increase interest costs for borrowers. The size of the effect differs widely between companies.
Which stocks are most sensitive to interest rates?
Companies whose value depends on distant cash flows, heavily indebted companies with floating or soon-maturing debt, REITs, utilities, homebuilders and banks are most often described as rate-sensitive. Each company's own filing shows its actual exposure.
Where in a 10-K is interest-rate risk disclosed?
Item 7A, "Quantitative and Qualitative Disclosures About Market Risk", plus the debt footnote listing borrowings and maturities.
Do banks benefit from higher rates?
It depends on how quickly their loan yields and deposit costs reprice. Net interest income can rise or fall; banks disclose their modelled sensitivity in their filings.