How do interest rates influence stock market performance?

Rising interest rates can increase borrowing costs for both consumers and businesses, which can significantly dampen consumer spending and investment. When interest rates rise, it becomes more expensive for individuals to take out loans for major purchases such as homes and cars. Similarly, businesses face higher costs when borrowing for expansion or investment in new projects. This reduction in spending and investment can lead to slower economic growth, negatively impacting corporate earnings and consequently the stock market performance.

As consumers spend less due to increased debt service costs, businesses may experience lower revenues, which can lead to a decrease in stock prices as investors adjust their expectations downward. Higher interest rates can also make fixed-income investments more attractive relative to stocks, prompting investors to shift their money away from equities, further exerting pressure on stock prices.

In contrast, rising interest rates are not typically associated with boosting consumer spending, nor do decreasing interest rates necessarily lead to decreased stock prices. Additionally, the assertion that interest rates have no significant impact on the stock market overlooks the critical relationship between cost of capital, consumer spending, and corporate profitability.