These Sectors Benefit From Rising Interest Rates (2024)

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 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 (and depending on the overall economic environment), an investor may 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.

An environment where interest rates rise amid signs of an improving economy can also offer opportunities for equity investors. To find such opportunities, it can be helpful to examine the sectors within the stock market that tend to benefit from higher rates in a healthy economy.

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 in higher interest income from higher interest rates.
  • 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.

The Interest Rate Environment

The COVID-19 pandemic had a pronounced, depressive effect on global financial markets. But it wasn't just the public that was worried. The deep uncertainty about economic activity led to the Federal Reserve slashing the federal funds rate to a range of 0% to 0.25%. It stayed at these levels until March 2022 when the Fed realized it needed to raise rates to combat rampant inflation.

Fed Chair Jerome Powell made the announcement on March 16, 2022. This was the first increase in the federal funds rate since 2018. Many economists believed the Fed would increase rates further to combat inflation, which was 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.

Stocks to Watch When Rates Rise

You should always bear in mind the current state of the economy when you're creating or making changes to your portfolio. This includes when the economy is improving and is healthy, or when it's overheated or inflationary.

In any case, there are certain stocks you may want to look at when interest rates rise, including:

CompanyTickerIndustry
Bank of AmericaBACFinancial (Banking)
JPMorgan ChaseJPMFinancial (Banking)
Goldman SachsGSFinancial (Investment Banking/Brokerages)
CitigroupCFinancial (Banking)
Charles SchwabSCHWFinancial (Investment Banking/Brokerages)
AllstateALLInsurance
AmTrust Financial ServicesAFSINInsurance
The Travelers CompaniesTRVInsurance
WhirlpoolWHRElectronics/Appliances
Kohl'sKSSRetail (Department Stores)
Costco WholesaleCOSTRetail (Specialty Stores)
Home DepotHDRetail (Home Improvement)
Ingersoll-RandIRIndustrial (Machinery)
PACCARPCARIndustrial (Trucking/Construction/Machinery)

Why do these companies perform well when interest rates increase? It all boils down to their industries.

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. Central bank monetary policies and the Fed's reserver ratio requirements also impact banking sector performance.

Banks

Rising rates can point to a strong economy. That 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 (CDs) and what they can earn from highly-rated debt like Treasuries.

Banks that might benefit as rates rise include:

  • Bank of America, which has a substantial presence throughout the U.S.
  • JPMorgan Chase with its robust operations in the U.S. and worldwide
  • Goldman Sachs Group with widespread investment banking and wealth management services
  • Citigroup, which does business in more than 160 countries

Brokers

On the broker front, companies like Charles Schwab and Goldman Sachs (which is also part of the banking group) hold promise during times of escalating rates for similar reasons. A healthy economy sees more investment activity and brokerage firms may 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 Allstate, AmTrust Financial, and Travelers don’t fare as well in low-rate climates because their underlying bond investments yield weak returns.

Insurers with 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 potential star performers in a healthy 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 that can be indicated by rising rates. Companies like Ingersoll-Rand PLCand manufacturers of heating, ventilation, and air conditioning systems, tend to outperform, as well as companies like PACCAR, a maker of heavy-duty trucks and truck parts. Such companies can be among the first to benefit from any increase in housing starts.

Have Interest Rates Risen Since the COVID-19 Pandemic?

Rate hikes began to rise in 2022. On March 16, 2022, the Fed announced it raised its target for the federal funds rate to a range of 0.25% to 0.50%. This was the first time that the Fed hiked the rate since 2018. Since then, however, the Fed has raised the Fed funds rate beyond that as it combats inflation. As of July 2023, the Fed's target range was 5.25% to 5.5%.

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. Those who want to take advantage of the environment could consider stocks in the relevant sectors listed in this article. Alternatively, investors could set themselves up in a defensive position. In this case, they could invest in consumer staples, healthcare, and possibly physical assets like gold and precious metals ETFs.

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

Financials tend to perform strongly in a rising interest rate environment (depending on the health of the overall market). 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. In a strengthening economic environment, also consider adjusting your equity investments to favor companies that may benefit from accompanying 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 oureditorial policy.

  1. Federal Reserve System. "How Does the Federal Reserve Affect Inflation and Employment?"

  2. Citigroup. "About Citi Latin America."

  3. Board of Governors of the Federal Reserve System. "Federal Reserve issues FOMC statement."

Compare Accounts

×

The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.

Provider

Name

Description

These Sectors Benefit From Rising Interest Rates (2024)

FAQs

These Sectors Benefit From Rising Interest Rates? ›

Financials First

What sectors benefit from high interest rates? ›

The financial sector generally experiences increased profitability during periods of high-interest rates. This is primarily because banks and financial institutions earn more from the spread between the interest they pay on deposits and the interest they charge on loans.

Which sectors will benefit from rate cuts? ›

Sectors Which May Benefit From An Interest Rate Cut

Certain economic sectors can benefit from falling interest rates. Depending on the circ*mstances, the consumer discretionary, information technology, utilities, real estate, consumer staples and/or materials sectors may see a boost as rates drop.

Where to invest when interest rates are rising? ›

These options could include:
  • Individual bonds versus bond funds.
  • Treasury bonds or notes.
  • Real estate investment trusts, or REITs, which tend to hold up well or even outperform during times of rising interest rates.
  • Preferred stocks versus common stocks.
Feb 20, 2024

Which asset classes benefit from rising interest rates? ›

Rising interest rates are a boon for savers and those with cash. With higher interest rates you'll profit from greater cash flow on your existing cash or short term bond fund. Cash, cash equivalents, short term debt, and financial securities are four investments that tend to profit when interest rates rise.

What sector will boom in 2024? ›

Tech Still Rules the Roost

Tech continues to dominate in 2024. As businesses expand digital capabilities, demand soars for everything from cybersecurity to cloud services and data analytics.

Who benefits from high inflation? ›

Inflation allows borrowers to pay lenders back with money worth less than when it was originally borrowed, which benefits borrowers. When inflation causes higher prices, the demand for credit increases, raising interest rates, which benefits lenders.

Which sectors perform best in inflation? ›

Several asset classes perform well in inflationary environments. Tangible assets, like real estate and commodities, have historically been seen as inflation hedges. Some specialized securities can maintain a portfolio's buying power, including certain sector stocks, inflation-indexed bonds, and securitized debt.

What sectors have the highest returns? ›

The best performing Sector in the last 10 years is Information Technology, that granded a +20.68% annualized return. The worst is Energy, with a +4.65% annualized return in the last 10 years. The main S&P 500 Sectors can be easily replicated by ETFs.

Which sector is best to invest in the share market? ›

Markets for Healthcare and Health Insurance

This is why healthcare stocks are the best stocks to invest in. Due to a rise in the number of people who need insurance, the proportion of premiums reached 4.2% in 2021. Stock market investment in the healthcare sector will be a wise decision.

What is the highest yield safe investment? ›

What is the safest high-yield investment? Treasury bonds and Series I bonds are among the safest investments around since they're backed by the full faith and credit of the federal government. That said, the returns aren't as substantial as what you'd see from investing in the stock market.

How rising rates make big companies even richer? ›

Companies that find they have more money thanks to higher rates can raise dividends, invest more and be more willing to pay up for the right staff, all supporting the economy. Take Microsoft, the world's second-most valuable company.

Should you invest in bonds when interest rates are high? ›

Should I only buy bonds when interest rates are high? There are advantages to purchasing bonds after interest rates have risen. Along with generating a larger income stream, such bonds may be subject to less interest rate risk, as there may be a reduced chance of rates moving significantly higher from current levels.

What is the best sector to invest in in 2024? ›

The tech sector was chosen as one of the best sectors for investors in 2024 due to its continuous innovation, growth potential, and increasing integration into all aspects of life and business.

What is the best place to invest money right now? ›

11 best investments right now
  • High-yield savings accounts.
  • Certificates of deposit (CDs)
  • Bonds.
  • Money market funds.
  • Mutual funds.
  • Index Funds.
  • Exchange-traded funds.
  • Stocks.
Mar 19, 2024

Are bank stocks a good buy during inflation? ›

Bank stocks increase in value during periods of inflation, which makes them appealing to investors. Higher net interest margins: Banks earn money from the difference between the interest rates they charge on loans and the interest rates they pay on deposits.

Are high interest rates good for the economy? ›

Do interest rate hikes hurt the stock market? If the Federal Reserve raises the short-term federal funds target rate it controls (as it did in 2022 and 2023), it can have a detrimental effect on stocks. A higher interest rate environment can present challenges for the economy, which may slow business activity.

Do insurance companies benefit from higher interest rates? ›

As noted above, the financial performance of life insurers generally improves with higher interest rates. As their existing bonds mature, they will be replaced by bonds with higher interest earnings.

How to make money in real estate with high interest rates? ›

Therefore, investing in rental properties during rising interest rates can be profitable. Purchase rental properties at a lower price due to reduced demand for buying homes and rent them out to tenants at a higher rate. This can result in higher rental income and potentially higher property value over time.

Top Articles
Latest Posts
Article information

Author: Zonia Mosciski DO

Last Updated:

Views: 6207

Rating: 4 / 5 (51 voted)

Reviews: 90% of readers found this page helpful

Author information

Name: Zonia Mosciski DO

Birthday: 1996-05-16

Address: Suite 228 919 Deana Ford, Lake Meridithberg, NE 60017-4257

Phone: +2613987384138

Job: Chief Retail Officer

Hobby: Tai chi, Dowsing, Poi, Letterboxing, Watching movies, Video gaming, Singing

Introduction: My name is Zonia Mosciski DO, I am a enchanting, joyous, lovely, successful, hilarious, tender, outstanding person who loves writing and wants to share my knowledge and understanding with you.