How do interest rates affect valuations?
David Craig
Updated on March 31, 2026
The direction of interest rates has an impact on stock valuation, stock pricing, and risk premium. When interest rates fall, and all else is constant, the share value will likely rise. When interest rates rise, and all else holds steady, the share value will likely fall.
What a rise in interest rates means for your portfolio?
If you have cash holdings in your portfolio, such as certificates of deposit, liquid savings accounts or money market instruments, rising rates mean a higher return on your investment. As rates climb, banks tend to offer correspondingly higher rates on deposit accounts.
How does the level of interest rates affect the return and risk of your portfolio?
When the investment outlook is good, interest rates tend to move higher to compensate investors who could earn even higher returns in risky assets like stocks. But rates decline when investors have a lower risk appetite and higher demand for conservative and stable cash flow.
How do I protect my portfolio from rising interest rates?
Below, eight experts from Forbes Finance Council share strategies investors can leverage to protect their portfolios from a rise in interest rates.
- Consider working with an active manager.
- Look into fixed instruments.
- Lock into a low-interest mortgage.
- Explore the utility sector.
- Own equities.
- Play the long game.
How do low interest rates affect valuations?
Low Interest Rates Have a Major Impact on Valuations It does this by discounting future cash flows based on a company’s cost of capital. With interest rates close to 0%, this makes future cash flows more valuable currently, all else equal.
When interest rates rise what happens to stocks?
When interest rates are rising, both businesses and consumers will cut back on spending. This will cause earnings to fall and stock prices to drop. On the other hand, when interest rates have fallen significantly, consumers and businesses will increase spending, causing stock prices to rise.
