How interest rates and inflation affect stocks
A change in interest rates can affect a company through borrowing costs, customers’ spending and the discount rate applied to future cash flows. The effect depends on the company’s balance sheet and business, as well as what investors already expected.
Start with the debt
In a hypothetical example, $100 million of floating-rate debt priced at 4% costs $4 million annually before other terms. At 6%, it costs $6 million. The $2 million difference is a mechanism you can calculate. Fixed-rate debt follows its own contractual terms until refinancing or another relevant event.
Customers may also face higher financing costs. A seller of expensive financed equipment can experience a different demand effect from a business selling low-cost necessities.
Distinguish the decision from the surprise
An announced policy change can already be reflected in prices. To describe a market reaction, compare the decision and guidance with prior expectations, rather than treating the direction of the rate move as a sufficient explanation.
Use a dated research note to preserve those expectations. Writing them after the announcement makes it easy to retrofit a persuasive story.
Inflation can raise both selling prices and input costs. Check which changes a business can pass through and how quickly. Rising nominal sales do not automatically mean more units sold.
For a company you are studying, identify one borrowing channel and one customer-demand channel. Read the relevant disclosures, then write a favourable and an unfavourable scenario. Keep the assumptions separate from a forecast of the share price.