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The interest rate used to translate a company's future profits into what they're worth today. Higher rates shrink the present value of future earnings — the main reason rising rates can pull stock prices down. (Different from the Fed's separate 'discount window' lending rate.)
Why It Matters
A stock's price is, in theory, the value of all its future profits discounted back to today. When the discount rate (driven by interest rates) rises, those future profits are worth less now — so higher rates mechanically pressure valuations, especially for high-growth companies whose profits sit far in the future. It's the engine behind 'rates up, stocks down' — and knowing it explains why that rule sometimes bends when growth expectations rise even faster.
Key Points
- Turns future profits into today's value; a higher rate means a lower present value.
- Why high-growth stocks (distant profits) are the most rate-sensitive.
- Distinct from the Fed's 'discount window' lending rate.
Related Terms
Common Questions
The interest rate used to translate a company's future profits into what they're worth today. Higher rates shrink the present value of future earnings — the main reason rising rates can pull stock prices down. (Different from the Fed's separate 'discount window' lending rate.) A stock's price is, in theory, the value of all its future profits discounted back to today. When the discount rate (driven by interest rates) rises, those future profits are worth less now — so higher rates mechanically pressure valuations, especially for high-growth companies whose profits sit far in the future.
A stock's price is, in theory, the value of all its future profits discounted back to today. When the discount rate (driven by interest rates) rises, those future profits are worth less now — so higher rates mechanically pressure valuations, especially for high-growth companies whose profits sit far in the future. It's the engine behind 'rates up, stocks down' — and knowing it explains why that rule sometimes bends when growth expectations rise even faster.
Turns future profits into today's value; a higher rate means a lower present value.
Why high-growth stocks (distant profits) are the most rate-sensitive.
Distinct from the Fed's 'discount window' lending rate.