Rising interest rates increase borrowing costs for companies and consumers, weighing on economic activity. Up to this point, the U.S. labor market has been solid, but the S&P 500’s 21% year-to-date decline reflects concerns on Wall Street that the economy may not take spiking interest rates in stride.
Growth stocks are particularly sensitive to rising interest rates because fund managers typically use discounted cash flow models to determine their price targets for growth stocks. Future cash flows are considered less valuable when the discounted rate is higher.
Inflation isn’t necessarily bad news for every stock market sector, however. Soaring oil, natural gas and other commodity prices have helped energy sector stocks generate record profits in 2022. The Energy Select Sector SPDR Fund (XLE) is up 64% so far this year amid broad-based market weakness.