These Sectors Benefit From Rising Interest Rates

Interest rates rise and fall as the economy moves through periods of growth and stagnation. The Federal Reserve is an important driver for rates, as Fed officials often lower rates when economic growth slows and then raise rates to cool the economy when inflation becomes a concern.

Increasing rates require careful attention when crafting an investment portfolio. For example, one approach might be to bolster positions in short-term and medium-term bonds (which are less sensitive to climbing rates) or implement a “bond ladder” to maximize cash and debt returns.

But an environment where interest rates are rising amid signs of an improving economy can also offer opportunities for investors within the equity space. A good starting point is examining the sectors within the stock market that tend to benefit from higher rates.

Key Takeaways

  • Some sectors within the stock market are more sensitive to changes in interest rates compared to others.
  • Financials benefit from higher rates through increased profit margins.
  • Brokerages often see an uptick in trading activity when the economy improves and higher interest income when rates move higher.
  • Industrials, consumer names, and retailers can also outperform when the economy improves and interest rates move higher.
  • Some sectors, such as real estate, can cool down during interest rate hikes.
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Sectors That Benefit From Rising Interest Rates

The Current Interest Rate Environment

The COVID-19 pandemic has had a pronounced effect on global financial markets. It wasn't only the public that was worried and the deep uncertainty about the world led to the Federal Reserve slashing its federal funds rate to 0% to 0.25%. These rates stayed at these levels until March of 2022, when the Fed realized they needed to raise the rates to combat rampant inflation.

Fed chief Jerome Powell made the announcement on March 16, 2022. This is the first time the Fed has raised the federal funds rate since 2018. Many economists believe the Fed will increase the rates further to combat inflation, which is above the target of 2%. Raising interest rates leads to higher borrowing costs, which can lead to a slowdown of growth which in turn helps to control inflation.

But even when growth is slowing down and interest rates are going up, there are still companies that are smart investments. Some stocks to buy when interest rates rise include:

  • Bank of America Corp. (BAC)
  • JPMorgan Chase & Co. (JPM)
  • Goldman Sachs Group Inc. (GS)
  • Citigroup Inc. (C)
  • E.TRADE Financial Corp. (ETFC)
  • Charles Schwab Corp (SCHW)
  • TD Ameritrade Holding Corp. (AMTD)
  • The Allstate Corp (ALL)
  • AmTrust Financial Services, Inc. (AFSIN)
  • The Travelers Companies, Inc. (TRV)
  • Whirlpool Corp. (WHR)
  • Kohl's Corp. (KSS)
  • Costco Wholesale Corp. (COST)
  • Home Depot, Inc. (HD)
  • Ingersoll-Rand PLC (IR)
  • PACCAR Inc. (PCAR)

Why do these companies perform well when interest rates are rising? It all comes down to the industries they are part of.

Financials First

The financial sector has historically been among the most sensitive to changes in interest rates. With profit margins that actually expand as rates climb, entities like banks, insurance companies, brokerage firms, and money managers generally benefit from higher interest rates.

Banks

Rising rates tend to point to a strong economy. And that health usually means that borrowers have an easier time making loan payments and banks have fewer non-performing assets. It also means that banks can earn more from the spread between what they pay (to savers for savings accounts and certificates of deposit) and what they can earn (from highly-rated debt like Treasuries).

Banks that might benefit as rates rise include Bank of America Corp. (BAC), which has a substantial presence throughout the U.S.; JPMorgan Chase & Co. (JPM), with its robust operations in the U.S. and worldwide; Goldman Sachs Group Inc. (GS), with widespread investment banking and wealth management services, and Citigroup Inc. (C), which does business in more than 160 countries. 

Brokers

On the broker front, companies like E*TRADE Financial Corp., Charles Schwab Corp. (SCHW), and TD Ameritrade Holding Corp., all hold promise during times of escalating rates for similar reasons. A healthy economy sees more investment activity and brokerage firms also benefit from increased interest income when rates move higher.

Insurers

Insurance stocks can flourish as rates rise. In fact, the relationship between interest rates and insurance companies is linear, meaning the higher the rate, the greater the growth. These same insurance providers, such as The Allstate Corp. (ALL), AmTrust Financial Services, Inc. (AFSIN), and The Travelers Companies, Inc. (TRV), don’t fare as well in low-rate climates because their underlying bond investments yield weak returns.

Insurers, which have steady cash flows, are compelled to hold lots of safe debt to back the insurance policies they write. In addition, the economic health dividend also applies to insurers. Improving consumer sentiment means more car purchasing and improving home sales, which means more policy-writing.

Beyond Financials

Financials aren’t the only star performers in a rising rate environment. Consumer discretionary stocks also can see a bump because improving employment, coupled with a healthier housing market, makes consumers more likely to splurge on purchases outside of the realm of consumer staples (food, beverages, and hygiene goods).

Manufacturers and sellers of kitchen appliances, cars, clothes, hotels, restaurants, and movies also benefit from the economic health dividend. Companies to keep an eye on during interest rate increases include appliance maker Whirlpool Corp. and retailers Kohl's Corp., Costco Wholesale Corp., and Home Depot, Inc.

Finally, the industrials sector also benefits from the economic health dividend indicated by rising rates. Companies like Ingersoll-Rand PLC and manufacturers of heating, ventilation, and air conditioning (HVAC) systems, tend to outperform, as well as companies like PACCAR, a maker of heavy-duty trucks and truck parts. Such companies are among the first to benefit from any increase in housing starts.

Frequently Asked Questions

Are Interest Rates Going to Rise in 2022?

Rate hikes have already begun in 2022, when on March 16, 2022, the Fed announced it raised its target for the federal funds rate to 0.25%-0.50%. This is the first time the Fed has hiked the rate since 2018. The Fed has a target median federal funds rate of 1.9% by the end of 2022.

What Are the Best Stocks to Buy When Interest Rates Are Set to Rise?

There are two different schools of thought when considering which stocks to buy before a rise in interest rates. The first is those who want to take advantage of the environment and should consider the stocks listed in this article. The other method is instead of attempting to capitalize on the environment, an investor could instead set themselves up in a defensive position. In this case, they would invest in consumer staples, healthcare, and possibly physical assets like gold and precious metals ETFs.

What Stocks Are Likely to Rise in 2022?

Because of the scheduled interest rate hikes, those stocks that will be affected in a positive way by the increases in borrowing costs should increase in value versus a broad-based market index.

Is Financial the Best Sector to Buy When Rates Are Rising?

Financials perform strongly in a rising interest rate environment. Depending on the health of the overall market when rates are rising, investors could see solid returns in defensive sectors as investors look to allocate their gains in sectors that are generally considered stable during market downturns.

The Bottom Line

You've adjusted your fixed-income portfolio to account for rising rates. Now is the time to adjust your equity investments to favor companies that benefit from the economic health dividend indicated by rising rates. Again, an excellent place to start is the financial sector. From there, as consumer confidence picks up and housing follows suit, consider manufacturers of durable goods, retailers, travel-related stocks, and the industrials sector.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Federal Reserve System. "How Does the Federal Reserve Affect Inflation and Employment?"

  2. Citigroup. "About Citi Latin America."

  3. The Federal Reserve. "March 16, 2022 FOMC Projections."

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