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Higher interest rates can weigh more on growth-stock valuations when a larger share of their expected value comes from cash flows far in the future. Raising the rate used to discount those cash flows reduces their value today more sharply than it reduces the value of cash flows expected sooner. That is a valuation mechanism, not a rule that growth stocks must fall whenever rates rise.
How discount rates connect interest rates to stock prices
A share represents a claim on future company cash flows, including dividends or other payouts. In a discounted-cash-flow framework, investors estimate those future payments and discount them back to today. The Federal Reserve’s May 2021 Financial Stability Report describes this general framework: an asset’s price reflects expected future payoffs discounted for time and risk.
When the discount rate rises, a payment expected years from now is worth less in today’s dollars. The effect is larger, proportionally, for a distant payment than for a near-term one, all else equal. As Ben Bernanke put it in a 2003 Federal Reserve speech, “as higher interest rates make a given future dividend less valuable in today’s dollars, higher interest rates reduce the value of a share of stock.”
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Why growth valuations may be more rate-sensitive
Growth companies are often valued partly on the expectation that their earnings and cash flows will expand substantially over time. If more of a company’s expected value rests on distant cash flows, a higher discount rate can have a larger effect on its valuation. This sensitivity to the timing of expected cash flows is sometimes called “equity duration.”
Value stocks, by contrast, may derive more of their estimated value from nearer-term cash flows or current earnings. That can make them less sensitive to a change in the discount rate in a simplified comparison. But “growth” and “value” are broad categories, not guarantees about any individual company’s cash-flow timing or market behavior.
Rates can also change the appeal of stocks relative to bonds
Higher real interest rates can make bonds and other relatively safer assets more attractive. Investors may then require a higher return to hold stocks, which can lower the price they are willing to pay for a given stream of expected company cash flows. Bernanke described this relative-attractiveness channel alongside the direct effect of discounting future dividends in his October 2, 2003 speech, “Monetary Policy and the Stock Market.”
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Why a rate increase does not determine which style wins
Interest rates are only one input into valuation. The Federal Reserve notes that asset prices can move because expected future payoffs change, discount rates change, risk premiums change, or several of these shift at once. A rate rise that comes with stronger expected growth, for example, may coincide with improving cash-flow expectations; a rise tied to higher perceived risk may have a different effect. Company profitability, financing needs, leverage and the market’s required return all matter too.
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1Fix the driver behind crashes, sound loss and screen glitches2Clear out junk files and repair common Windows errors3Scan for outdated or missing drivers - takes under a minuteMarkets also react to information, not just to the formal policy decision. In the historical sample discussed in Bernanke’s 2003 speech, anticipated policy moves had small and statistically unimportant stock-price effects, while unexpected moves mattered. The speech also found that unexpected policy changes explained only a tiny portion of overall market variability. Those historical results are not a current forecast or a universal rule, but they illustrate why an expected rate hike does not automatically produce a predictable decline.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.What the evidence does—and does not—show
The Federal Reserve’s framework supports the basic discounting explanation, but it does not promise that growth stocks will underperform value stocks during every period of rising rates. A separate Federal Reserve staff paper, “The Response of Equity Yields to a Long-Run Shock,” last updated September 4, 2026, reports that growth-firm equity yields respond more strongly than value-firm yields to a positive long-run growth shock, reflecting larger changes in expected dividend growth. That is evidence about a growth shock, not a direct test showing that every rate rise hurts growth stocks more. The Board identifies the paper as preliminary research that does not indicate concurrence by other Board staff or the Board of Governors.
Bernanke’s speech also gives historical figures that need careful context. In its analysis of 1989–2002 monetary-policy surprises, the market response to a surprise 25-basis-point easing ranged from 3 to 6 percentage points, with larger responses associated with changes perceived as more permanent. This was a historical market-level result—not a forecast for an individual stock or a current policy move. The speech’s reference to stocks paying 5 to 6 percentage points more per year than government bonds was a long-run historical risk-premium illustration, not a current expected premium.
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How to use the growth-versus-value distinction
- Think of rate sensitivity as a tendency tied to the timing of expected cash flows, not as a dependable trading signal.
- Separate a change in discount rates from changes in expected company cash flows and risk premiums; they can move together.
- Consider the reason rates changed and whether the move was expected. The same rate change can accompany different news about growth, inflation or risk.
- Do not assume every company in a style category has the same cash-flow profile or will respond in the same way.
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