How do interest rates typically affect stock prices?

Interest rates play a significant role in the valuation of stocks and can influence investor behavior. When interest rates rise, it generally increases borrowing costs for companies, which can lead to reduced capital expenditure and slower growth. This can create a negative perception among investors, leading to a decrease in stock prices. Additionally, higher interest rates might encourage investors to move their money from stocks to more secure fixed-income investments like bonds that offer better yields, further putting downward pressure on stock prices.

Conversely, when interest rates are lower, the cost of borrowing decreases, which can ease financial pressures on companies and stimulate investment in growth initiatives. Lower interest rates make equities more attractive compared to fixed-income securities, as the returns on those may not keep pace with inflation or could be less appealing than the potential growth of stocks. This dynamic generally supports higher stock prices.

Understanding the relationship between interest rates and stock prices is essential for investors, as it highlights how macroeconomic factors can influence market dynamics and investment strategies.