When interest rates rise, stock prices generally fall. When the economy is overheated, there are concerns about inflation and interest rates rise, as a result, it is difficult to make money from investments.

However, there are some industries whose stock prices tend to rise when interest rates rise. Companies that are more likely to earn profits when interest rates rise are resistant to rising interest rates and inflation. Stocks in these industries include banking stocks and energy stocks.

Why do banks and energy-related companies benefit more from rising interest rates and why are their stock prices more likely to rise?

When thinking about making money by investing in stocks, you have to learn which stocks are resistant to rising interest rates and inflation. I will explain which sectors to invest in when interest rates are rising and inflation is a concern.

Usually, Rising Interest Rates Cause Stock Prices to Fall

Why are interest rates and inflation so important in stock investment? It is because when interest rates rise, stock prices tend to fall.

When the economy is overheating, inflation pressures become stronger. In addition, central banks such as the Fed raise their policy interest rates to control over-inflation and try to keep the economy from overheating by raising interest rates.

So why do stock prices tend to fall when interest rates rise? The reason is that the theoretical stock price can be calculated by the following formula.

There is an interest rate in the denominator. In other words, when the interest rate rises, the theoretical stock price becomes lower. The reason why stock prices tend to fall when interest rates rise is that this formula can be used to calculate the theoretical stock price.

If a Company Makes More Money, Its Stock Price Will Increase

When interest rates rise due to an overheated economy and inflation, you might think that stock prices would decrease for all companies. However, in reality, there are companies whose stock prices will increase even if interest rates are rising. Why do their stock prices increase despite the rise in interest rates?

The reason is simple: if a company makes money by doing business, its stock price will rise even if interest rates are rising.

Rising interest rates are a negative factor for stock prices. However, if the company can make a larger profit than the rising interest rate, the stock price will go up. In short, if you invest in a profitable company, its stock price will rise even if interest rates rise.

A stock that is resistant to inflation is a company that is profitable even when interest rates are rising.

What US Stock Sectors Are Resistant to Rising Interest Rates and Inflation?

What specific industries are resistant to rising interest rates and inflation? These sectors include the following.

  • Banking stocks
  • Energy stocks
  • High growth technology stocks

Many people believe that technology stocks are vulnerable to rising interest rates. In the short term, it is true that the stock prices of technology companies are likely to fall as long-term interest rates rise. However, in the long term, stock prices will rise.

Why are banking, energy and technology stocks good investments when inflationary pressures are high? Since it is common sense to invest in US stocks, I will use US stocks as an example.

In many cases, stocks in developed and emerging countries other than the US have little or no growth in stock prices. In addition, long-term interest rates are often low in developed countries other than the United States. When investing in non-US stocks, be aware that even when interest rates are rising, the stock prices of banks and energy companies may not rise.

Bank Stocks Are a Sector That Can Profit from Rising Interest Rates

Why do rising interest rates make banks more profitable and cause their stock prices to rise? This is because banks are in the money lending business.

Banks earn interest income by lending money to companies and individuals. However, when policy interest rates (short-term interest rates) and long-term interest rates are low, they earn little when they provide loans to companies and the general public.

On the other hand, if the interest rate is high, the bank can earn more interest. In other words, they can earn more profit. For banks, the higher the interest rate, the more profit they can make. Therefore, if you invest in bank stocks when interest rates are rising, you can make money by investing in stocks.

Also, when interest rates are rising, the economy is booming. Many companies are willing to borrow money, which makes it easier for banks to make more profit.

Rising Inflation Pushes Energy Prices Higher

Similarly, energy stocks are tend to rise in price when interest rates rise. Why do energy-related companies increase their stock prices when interest rates rise?

Of course, rising interest rates do not cause energy companies’ profits to rise. However, when interest rates rise, the economy heats up, as mentioned above. There is also strong inflationary pressure.

When there is inflation, energy consumption is high. Many companies, including manufacturers and transportation companies, accelerate their business by consuming energy. Also, consumer spending becomes stronger. For example, if many people travel and fly, they will consume more energy.

As a result, energy prices, such as oil, coal, and gas, will rise. Energy is prone to price increases due to inflationary pressures. Naturally, when energy prices go up, energy companies can make a lot of profit. For this reason, energy-related companies are considered to be inflation-resistant US stocks.

Tech Stocks Are Recommended for Long-Term Investment

It is true that rising interest rates and inflation make it easier for banks and energy companies to make profits. However, these companies are not suitable for long-term investment because they do not have much growth potential. When inflationary pressures are strong, banks and energy companies are the best investments for the short term.

On the other hand, if you are planning to invest for longer than two to three years, invest in high-tech companies. High-tech companies have a lot of bank loans, and their stock prices are likely to drop as interest rates rise. However, the growth rate of high-tech companies is high, and even if the stock price declines in the short term, the stock price will rise in the long term.

As an example, here is a historical chart of the 10-year US Treasury yield (long-term interest rate) and the Nasdaq 100.

In the United States, many technology companies are listed on Nasdaq. The Nasdaq 100 represents the stock prices of the top 100 of these companies.

Even when long-term interest rates (the blue line) are rising sharply, the Nasdaq 100 stock price (the red line) is rising over the long term. If you check the above chart, you will see that in the short term, the stock price has fallen for about one to three months due to the rise in long-term interest rates. However, for long-term investments of two to three years or more, the stock price has risen regardless of the rise in long-term interest rates.

The reason for this, as mentioned earlier, is that technology companies have high profit margins and growth rates. Also, when the economy is strong, technology companies are more likely to make profits. Therefore, if you are looking for a long-term investment rather than a short-term investment of less than one year, I recommend investing in technology companies rather than bank stocks or energy stocks.

Investing in Stocks That Will Rise in Price Even with Rising Interest Rates and Inflation

When investing in stocks, most people expect the stock price to rise. Therefore, it is important to understand what stocks are likely to rise in price.

When the economy is booming, inflationary pressures cause long-term interest rates to rise. Also, the Fed and other central banks try to keep the economy from overheating by raising policy rates. When these situations occur, banks and energy-related companies are more likely to increase their profits, and thus their stock prices are likely to rise.

In the long term, the stock prices of high-tech companies will also rise even when interest rates rise. In the short term, rising interest rates will cause stocks of high-tech companies to sell off. However, in the long run, their stock prices will rise significantly. High tech stocks are recommended for long term investment because bank stocks and energy stocks have little long term upside.

Even with rising interest rates and inflation, there are industries where stock prices tend to rise. Be sure to find out in advance what sectors are best to invest in.