Which Stocks Could Perform Best When Interest Rates Rise?

Which Stocks Could Perform Best When Interest Rates Rise?

With US interest rates moving higher, investors are beginning to look at which areas of the stock market have historically performed well during rate-hiking cycles.

Research from Charles Schwab looking at five previous hiking cycles between 1994 and 2015 found that energy, financials and information technology were among the strongest-performing sectors.

Financial stocks are often closely watched when rates increase. Banks and other lenders may be able to generate higher income from loans, particularly when the interest they charge borrowers rises faster than the amount they pay depositors.

Energy companies have also historically performed well during some hiking cycles. Demand for essentials such as oil, gas and electricity can remain relatively strong even when economic conditions become more challenging. Commodity prices and global supply conditions can also have a major influence on the sector.

Technology may appear more surprising, as higher rates can sometimes hurt growth stocks. However, large technology companies with strong profits, healthy balance sheets and large cash reserves can potentially cope better than more speculative businesses.

Investors may also change how they position their portfolios. Some may increase their cash holdings while waiting for cheaper stock prices, while others may look towards bonds as higher yields make fixed-income investments more attractive.

This process is often known as sector rotation, where investors move money between different parts of the market depending on economic conditions.

Past performance does not guarantee that the same sectors will outperform during the current cycle, but previous rate-hiking periods can provide useful insight into how investors may respond.