Why Do Stocks Suffer When Interest Rates Rise?

is in the denominator: that means as interest rates increase, the net-present value of the correspondingThus, in an environment where interest rates, as determined by US Treasury yields, are rising, future cash flows that a company produces are worth relatively less today. For companies that comprise US stock markets, rising interest rates means that they are theoretically producing a smaller return in the future.

This relationship is particularly bad for smaller, fledgling companies with relatively minimal cash flows, and is especially bad for companies that are not cash flow positive at present time. Companies that are still in their early stages of growth, those seeking to achieve advancements that would change industries or the economy – newer tech stocks, for example – tend to suffer even more because they don’t have significant cash flows and might carry a great deal of debt.

The DCF formula explains ARKK’s problems succinctly, and those of the broader stock market, in particular, the tech-heavy Nasdaq 100: the companies don’t have significant cash flows, and as interest rates rise, their net present value drops quickly.

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