Will Higher Rates Doom Stocks?

Stocks

Central Bank

Summary:

In this article, Russ Koesterich discusses why stocks could continue to advance in 2025 despite the potential for a higher interest rate environment.

Key takeaways

● Historically, higher rates have exerted downward pressure on stock multiples, i.e. valuations. That said, the relationship has only been significant with extreme moves of 3% or higher.

● A modest rise of rates on the back of stronger nominal growth (NGDP) would support earnings.

While stocks can move higher, the bond market will continue to matter. Higher rates suggest that equity leadership may continue to reside in companies that are relatively rate insensitive.

While stocks wobbled at year’s end, equities enjoyed another strong year. For the first time since the late 1990’s, stocks posted two consecutive years of 20% or better gains. Still, investors ended the year on a nervous note. Inflation remains sticky and long-term yields elevated. For the calendar year 2024, U.S. 10-year yields climbed roughly 0.60%, driven by a 0.50% increase in real or inflation adjusted rates. This leaves the question: Can stocks continue to advance if rates continue to rise? My own view is yes, assuming any further rise in rates is modest.

There are two reasons equities can survive higher rates: rates and stocks have a complicated relationship, and higher rates are often accompanied by faster economic growth. Historically, higher rates have exerted downward pressure on stock multiples, i.e. valuations. That said, the relationship has only been significant at the extremes. In other words, small changes in rates have not had much of an impact on valuations. In the past, it has been when real rates have reached extremes, around 3% or higher, that stock valuations have often suffered.

Apart from the level of rates is the question of why rates are rising. If rates surge due to concerns over deficit spending markets would be at risk. However, a modest rise on the back of stronger nominal growth (NGDP) would support earnings. Assuming NGDP of 4.5% to 5.0%, earnings have the potential to beat expectations. Even if valuations do slip, stocks can advance on the back of solid earnings growth.

Watch the hedges and market leadership

While stocks can move higher, the bond market will continue to matter. Two rate related issues to watch: stock/bond correlations and the impact of ‘rate beta’ within market leadership.

As stocks have continued to grind higher over the past two calendar years, investors have had to rethink how to hedge those gains. As I have discussed in previous blogs, bonds have become a less reliable hedge. If investors are equally or more worried about rates than a recession, stock/bond correlations are likely to remain positive, making long-term bonds a source of risk rather than risk mitigant.

High rates also suggest that equity leadership may continue to reside in a handful of mega-cap companies that are relatively rate insensitive. This is because those market segments most sensitive to interest rates remain vulnerable. The list includes companies dependent on constantly raising fresh capital, including many small cap names, as well as stocks owned primarily for their dividend yields.

The flip side of this dynamic is that many of the recent leaders will continue to enjoy a relative advantage. Apart from supportive secular trends, many of the mega-cap tech and adjacent names are likely to continue to benefit from low debt, big cash balances and resilient earnings growth .

Global sector earnings & sales growth

12m forward earnings and sales growth estimates (MSCI World sectors)

Source: LSEG Datastream, MSCI and BlackRock Investment Institute. Jan 06 ,2025Note: The bars show the aggregate analyst earnings growth forecasts for global sectors. Dots show sales growth estimates.

The bottom line for investors

I would not sell equities based solely on higher rates. Stocks, at least the large ones that dominate the U.S. indices, have the potential to prove resilient given their strong balance sheets and cash-flow momentum. However, rates will matter in other ways. Even modestly higher rates may result in another year in which leadership resides in a relatively small number of highly profitable, cash-rich companies.

Sources:BlackRock

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Adam

Energy

Economic

Massive Financial Commitments to Power Africa

At the recent African leaders' summit in Dar-es Salaam, Tanzania, the Islamic Development Bank (IsDB) and the Asian Infrastructure Investment Bank (AIIB) announced a combined investment of over $6 billion to accelerate electricity access across Africa. The initiative seeks to address one of the continent’s most pressing development challenges—energy poverty—by expanding grid access to underserved regions.

Muhammad al Jasser, President of IsDB, confirmed that the Jeddah-based bank will allocate $2.65 billion toward electrification projects and provide an additional $2 billion in insurance for energy-related initiatives. Meanwhile, the AIIB, headquartered in Beijing, committed between $1 billion and $1.5 billion to support infrastructure financing.

Scaling Up Africa’s Energy Infrastructure

These new commitments supplement the existing $48 billion pledged by the World Bank and the African Development Bank under the “Mission 300” initiative, which was launched in April 2024. The program aims to mobilize $90 billion in total funding from multilateral development banks, private sector enterprises, development agencies, and philanthropic organizations.

World Bank President Ajay Banga emphasized the importance of electrification in driving economic growth and job creation across the continent. He highlighted that this initiative will provide electricity to half of Africa’s current population without access, laying the groundwork for long-term development and industrialization.

Challenges and Opportunities in Africa’s Energy Transition

Africa's electrification efforts face multiple challenges, including inadequate infrastructure, political instability, and financial constraints. Many African nations still rely heavily on fossil fuels and outdated grids, making large-scale investments in renewable energy and modern power systems crucial for sustainable growth.

However, this wave of investment presents a significant opportunity for Africa to leapfrog traditional energy models and develop a more resilient, decentralized power network. Renewable energy sources such as solar, wind, and hydroelectric power are expected to play a central role in the continent’s energy transition, offering long-term sustainability and cost-effective solutions.

A Transformational Moment for Africa’s Development

The increasing financial commitments from international banks signal growing confidence in Africa’s economic potential. If implemented successfully, these investments could mark a transformational shift, improving living standards, boosting industrial productivity, and fostering regional economic integration.

As global interest in Africa’s development grows, continued collaboration between governments, financial institutions, and private investors will be crucial in ensuring that electrification efforts translate into sustainable economic benefits for millions of Africans.

Source: Reuters

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Manuel

Cryptocurrency

Political

U.S. Senator Cynthia Lummis of Wyoming is taking the fight for crypto regulation to the courts, formally backing crypto exchange Coinbase in its legal battle against the U.S. Securities and Exchange Commission (SEC). In an amicus brief filed on Jan. 24 with the U.S. Court of Appeals for the Second Circuit, Lummis challenged what she described as the SEC’s “failed legislation-by-enforcement strategy” under former Chair Gary Gensler and the Biden administration. She argued that the agency’s actions have created regulatory confusion and threaten to push digital asset innovation out of the United States.

Lummis specifically criticized the SEC’s handling of securities laws in relation to digital assets, stating that its enforcement-first approach lacks transparency and bypasses Congress’s role in creating clear regulations. The lawmaker stressed:

The SEC’s approach under the Biden administration was to aggressively reinterpret case law governing Howey and investment contracts, keep those interpretations secret, and then demand compliance from digital asset exchanges. Such an approach is un-American. It is the job of Congress to provide a legislative framework that clearly draws the line between a security and a commodity.

She warned that by relying on outdated legal definitions, the SEC is creating legal uncertainty that could drive crypto businesses and jobs overseas.

The senator’s intervention comes as Congress continues working on bipartisan efforts to establish a comprehensive regulatory framework for digital assets. Lummis, a strong advocate for the industry, has co-sponsored legislation aimed at distinguishing between digital commodities and securities.

By supporting Coinbase’s appeal, she hopes to push back against what she sees as regulatory overreach and reaffirm that only Congress—not unelected regulators—has the authority to set digital asset policy. The case, now before the Second Circuit, could have far-reaching consequences for the future of cryptocurrency regulation in the United States.

A longtime pro-bitcoin advocate, Lummis has positioned herself as one of the most vocal supporters of cryptocurrency in Congress. This month, President Donald Trump nominated her to chair the newly formed Senate Banking Subcommittee on Digital Assets, a panel tasked with shaping U.S. policy on crypto and exploring the potential for a strategic bitcoin reserve. “Digital assets are the future, and if the United States wants to remain a global leader in financial innovation.

Congress needs to urgently pass bipartisan legislation establishing a comprehensive legal framework for digital assets,” Lummis stated. Her leadership in this space signals an increasing focus on digital assets within the federal government as the industry continues to expand.

Source: Bitcoin.com

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Manuel

Economic

U.S. economic growth slowed in the fourth quarter as a strike at Boeing (BA.N), contributed to depressing business investment, but robust consumer spending probably keeps the Federal Reserve on a slow interest rate cut path this year.

The moderation in growth last quarter reported by the Commerce Department on Thursday was also because inventories at businesses were run down, underscoring the strong domestic demand.

The economy last year defied dire predictions of a recession that had been fanned by the U.S. central bank hiking rates by 5.25 percentage points in 2022 and 2023 to quell inflation. Dissatisfaction with the economy swept President Donald Trump to victory in the Nov. 5 election.

"This report will assure the Fed policy was not overly restrictive last quarter," said Will Compernolle, macro strategist at FHN Financial. "Whatever the economic fundamentals were at the end of last year, however, new federal policies could set the economy on a new path soon."

Gross domestic product increased at a 2.3% annualized rate last quarter after accelerating at a 3.1% pace in the July-September quarter, the Commerce Department's Bureau of Economic Analysis said in its advance GDP estimate.

Economists polled by Reuters had forecast GDP rising at a 2.6% pace. Estimates ranged from a 1.7% pace to a 3.2% rate. Nonetheless, domestic demand remains very strong. Final sales to private domestic purchasers - which exclude inventories, trade and government - increased at a 3.2% rate.

This measure of domestic demand grew at a 3.4% pace in the third quarter. Inflation warmed up last quarter, with the personal consumption expenditures (PCE) price index, excluding food and energy, rising at a 2.5% rate compared to a 2.2% pace in the third quarter.

Growth for the full year came in at 2.8%. The economy grew 2.9% in 2023. It is expanding well above the 1.8% rate that Fed policymakers view as the non-inflationary growth pace.

The Fed on Wednesday left its benchmark overnight interest rate in the 4.25%-4.50% range, having reduced it by 100 basis points since September. It removed a reference to inflation having "made progress" toward the Fed's 2% inflation goal.

Fed Chair Jerome Powell told reporters that the economy "is strong overall." The central bank has forecast only two rate cuts this year, down from the four it had projected in September, when it embarked on its policy easing cycle.

That reflected uncertainty about the economic impact of fiscal, trade and immigration policies from the new Trump administration. Economists view the planned tax cuts, broad tariffs on imports and mass deportations of undocumented immigrants as inflationary. They expect economic growth to falter by the second half and inflation to rise.

U.S. stocks opened higher. The dollar slipped against a basket of currencies. U.S. Treasury yields fell. Weak Business Spending Restrains US Economy; Domestic Demand Robust_1

Weak Business Spending Restrains US Economy; Domestic Demand Robust_1

CONSUMER SPENDING SOARS

Consumer spending, which accounts for more than two-thirds of the economy, grew at a 4.2% rate last quarter. That was the fastest since the first quarter of 2023 and followed a 3.7% pace in the July-September quarter.

Spending is being underpinned by a resilient labor market, which is churning out solid wage gains. That was reinforced by a separate report from the Labor Department showing initial claims for state unemployment benefits dropped 16,000 to a seasonally adjusted 207,000 for the week ended Jan. 25. Weak Business Spending Restrains US Economy; Domestic Demand Robust_2

Weak Business Spending Restrains US Economy; Domestic Demand Robust_2

Imports declined despite robust consumer spending, compressing the trade deficit. Trade was neutral to GDP after being a drag for three consecutive quarters. Less inventory was accumulated by businesses, suggesting that consumers were engaged in pre-emptive buying in anticipation of tariffs.

Inventories increased at a $4.4 billion rate after rising at a $57.9 billion pace in the July-September quarter. They subtracted 0.93 percentage point from GDP. Trade and inventories are the most volatile components of GDP.

A crippling strike by factory workers at Boeing from mid-September through early November, which disrupted production and delivery of aircraft, contributed to depressed spending on equipment. Investment in equipment contracted at a 7.8% rate following double-digit growth in the third quarter.

Spending on structures declined for a second straight month. While investment in intellectual property products increased, the pace slowed from the third quarter.

Residential investment rebounded, but rising mortgage rates remain an obstacle. Growth in government moderated and the outlook is cloudy amid plans by the Trump administration to slash spending.

Source: Reuters

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Adam

Economic

Record-breaking Winter Disrupts Economies Worldwide

The ongoing winter season has wreaked havoc across multiple continents, leading to economic losses, infrastructure damage, and disruptions in key industries. The combination of extreme snowfall, freezing temperatures, and prolonged cold waves has paralyzed daily life, affecting global trade and economic activity.

United States: Blizzard Causes $1.2 Billion in Damages

A massive snowstorm hit the U.S. East Coast in early 2025, bringing heavy snowfall and record-low temperatures. Major cities faced transportation paralysis, flight cancellations, and widespread power outages. The National Oceanic and Atmospheric Administration (NOAA) reported an estimated $1.2 billion in economic losses due to the storm, with businesses and supply chains suffering severe setbacks.

Europe: $3 Billion Losses Due to Transportation Disruptions

European nations, including Germany, France, and the UK, have been significantly affected by relentless snowfall. Public transportation systems ground to a halt, and supply chain disruptions impacted key industries. Economic losses across Europe are estimated at around $3 billion, with severe weather conditions expected to continue into February.

Japan: Agricultural and Transportation Sector Takes a $1 Billion Hit

Japan has faced intense snowstorms that disrupted railway operations, particularly affecting high-speed train services. The agricultural sector suffered as freezing temperatures damaged crops, causing long-term financial setbacks for farmers. National broadcaster NHK reported that economic losses from the winter storms have reached approximately $1 billion.

South Korea: Energy Demand Surges as Economy Loses $500 Million

South Korea experienced one of its coldest winters in years, with energy demand soaring due to heating needs. Localized power outages were reported, and extreme weather conditions exacerbated infrastructure vulnerabilities. According to Yonhap News, the economic damage is estimated at $500 million, with the hardest-hit areas concentrated in Gyeonggi Province. The city of Anseong alone recorded over $25 million in property damage and multiple casualties.

Canada: Toronto Struggles With Harsh Cold, Suffering $800 Million in Losses

Toronto faced prolonged subzero temperatures between late December 2024 and early January 2025. Heavy snowfall disrupted business activities, canceled flights, and strained public services. The Canadian Broadcasting Corporation (CBC) estimated the economic impact at around $800 million.

Russia: Agricultural Sector Suffers Due to Unpredictable Snowstorms

In Moscow, frequent snowstorms—some even appearing as late as May—have disrupted the Russian economy, particularly in agriculture. Grain market analyst Alexander Korbut highlighted that frost damage has significantly impacted fruit and berry crops, worsening food security concerns.

China: Beijing Records $1.2 Billion in Cold-related Losses

Beijing has endured prolonged cold spells, with nighttime temperatures regularly dropping below -5°C throughout January 2025. Industrial production slowed down as extreme weather conditions affected supply chains. Xinhua News reported an estimated economic loss of $1.2 billion due to the extended winter freeze.

Vietnam: Cold Snap Hits Agriculture, Causing $170,000 in Losses

Northern Vietnam has been affected by an extreme cold wave since January 2025, with mountain regions experiencing frost and freezing rain. These conditions have led to significant agricultural losses, particularly for livestock and crops. In Sơn La, 100 hectares of coffee plantations have been damaged due to prolonged frost, resulting in estimated losses of 4 billion VND ($170,000). The timing of the cold spell, occurring just before the Lunar New Year, has further strained local farmers.

Climate Change and Economic Vulnerabilities

The severity of the 2024-2025 winter underscores the increasing risks associated with climate change. Extreme weather events, including prolonged cold spells and unpredictable snowfall, disrupt global economic stability and supply chains. The mounting financial toll on infrastructure, agriculture, and energy sectors highlights the need for stronger climate resilience strategies.

The widespread economic impact of this severe winter serves as a stark reminder of the challenges posed by climate-induced weather extremes. Governments and industries must prioritize investment in climate adaptation strategies, infrastructure resilience, and early warning systems to mitigate future disruptions. As climate patterns become more erratic, proactive planning will be critical in safeguarding economic stability and reducing financial losses.

Source: VNF

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Warren Takunda

Economic

The eurozone economy grounded to a halt in the fourth quarter of 2024, as Germany and France, the bloc’s two largest economies, posted worse-than-expected contractions, reinforcing concerns over persistent economic weakness in the region.

According to preliminary data released by Eurostat on Thursday, eurozone gross domestic product (GDP) remained unchanged from the previous quarter, a sharp slowdown from the 0.4% growth recorded in the third quarter and below the 0.1% expansion forecast by analysts. This marks the weakest performance since the fourth quarter of 2023.

For the broader European Union (EU), GDP edged up 0.1% quarter-on-quarter. On an annual basis, seasonally adjusted GDP increased by 0.9% in the euro area and 1.1% in the EU, slightly improving from the previous quarter’s readings of 0.9% and 1.0%, respectively.

Germany and France disappoint, Portugal outperforms

The biggest drag on growth came from Germany and France, which both unexpectedly contracted.

Germany’s economy shrank by 0.2%, worse than the anticipated 0.1% decline, while France’s GDP fell by 0.1%, missing expectations of stagnation. Meanwhile, Italy’s economy remained flat for a second consecutive quarter, defying projections of a modest 0.1% increase.

On the other hand, some peripheral economies outperformed, with Portugal (+1.5%) leading the growth rankings, followed by Lithuania (+0.9%) and Spain (+0.8%).

The weakest performances were recorded in Ireland (-1.3%), Germany (-0.2%), and France (-0.1%).

"Once again, it is the periphery driving most of the growth, with particularly strong expansions in Portugal and Spain. France and Germany remain a drag, as both face well-documented structural and cyclical headwinds alongside political turmoil," said Kyle Chapman, FX Markets Analyst at Ballinger Group.

ECB rate cut widely expected amid weak data: More to come?

The weaker-than-expected GDP figures strengthen expectations that the European Central Bank (ECB) will cut interest rates at its policy meeting today.

Markets are fully pricing in a 25-basis-point reduction to 2.75%, and predict four rate cuts expected by the end of 2025.

Frankfurt remains under pressure to continue its rate-cutting cycle to stimulate an economy that is visibly struggling, while inflation progresses towards the ECB’s 2% target.

ECB President Christine Lagarde is expected to stress that monetary policy alone is not sufficient to revive growth and that fiscal measures, alongside structural reforms, are needed to improve competitiveness.

Policy divergence between ECB and Fed widens

The ECB’s expected rate cuts highlight a growing monetary policy divergence with the US Federal Reserve, which kept rates steady between 4.25% and 4.50% at its Wednesday meeting.

Fed Chair Jerome Powell reiterated there is “no rush” to cut rates further, highlighting the resilience of the US economy.

"The eurozone economy is fragile, facing stagnant growth and rising recession risks. Q4 GDP data confirms near-zero growth, and PMI surveys indicate ongoing manufacturing contraction. In contrast, the US economy remains robust, driven by consumer spending, a tight labour market, and AI-driven investment," said Boris Kovacevic, Global Macro Strategist at Convera.

Market reactions

The euro remained steady around $1.04 in mid-morning European trading ahead of the ECB meeting. Sovereign bond yields fell across the eurozone, reflecting increased demand for safe-haven assets.

The benchmark German Bund yield dropped 6 basis points to 2.52%, while France’s 10-year OAT yield declined to 3.26%. Italy’s BTP yield slid 7 basis points to 3.60%.

Eurozone equities saw limited reaction, with the Euro STOXX 50 index rising 0.5%. Dutch semiconductor giant ASML Holding N.V. gained 3.3%, extending its 5.5% rally from Wednesday, after posting stronger-than-expected earnings and issuing an improved outlook.

Germany’s DAX index climbed 0.2% to a new record high, although Deutsche Bank shares slumped 3.4%, as investors reacted to stagnant revenue guidance and rising costs.

Spain’s IBEX 35 outperformed, rising 0.8%, led by gains in real estate and banking stocks.

Source: Euronews

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Adam

Economic

Fed Maintains Interest Rates Amid Economic Uncertainty

On January 29, the Federal Reserve opted to keep interest rates unchanged at 4.25%-4.5%, marking a pause after three consecutive rate cuts. This decision, unanimously supported by all 12 voting members of the Federal Open Market Committee (FOMC), reflects the Fed’s measured stance amid a stable yet unpredictable economic environment.

Chairman Jerome Powell emphasized that there is no urgency to adjust rates, highlighting the Fed’s commitment to data-driven decision-making. He noted that while inflation has moderated, it remains above the 2% target, necessitating a wait-and-see approach. The central bank's decision comes at a time when macroeconomic fundamentals appear steady, yet potential policy shifts under Trump’s administration—ranging from tariffs to tax reforms—could introduce volatility.

Financial analysts, including Greg McBride from Bankrate, pointed out that progress toward the 2% inflation goal has stalled, reinforcing the Fed’s cautious stance. McBride stated that unless there is a consistent stream of positive inflation data, further rate cuts are unlikely in the near term.

Stock Market Responds With Mild Declines

Following the Fed’s announcement, U.S. equities experienced moderate losses. The Dow Jones Industrial Average dropped 225 points (0.5%) before recovering slightly to close 137 points lower (-0.31%). The S&P 500 and Nasdaq Composite also saw declines of 0.47% and 0.51%, respectively.

The market’s reaction suggests that investors had already priced in the likelihood of interest rates remaining elevated for an extended period. The Fed’s stance aligns with its signals from the December meeting, where policymakers hinted at a potential pause in rate reductions for early 2025.

Trump’s Frustration: A Clash Over Monetary Policy

President Donald Trump had publicly urged for immediate rate cuts, stating at the World Economic Forum in Davos a week earlier, "I will demand a rate cut immediately." However, the Fed’s decision to maintain its stance contradicts his expectations, further straining relations between the central bank and the White House.

During his post-meeting press conference, Powell dismissed suggestions of direct communication with Trump, reaffirming the Fed’s independence. He stressed that monetary policy decisions would be guided by economic data rather than political pressure.

Trump, however, was quick to criticize the Fed’s decision. Hours after the announcement, he took to his social media platform, Truth Social, accusing the Fed of failing to address inflationary challenges. He reiterated his plan to "boost American energy production, cut regulations, rebalance international trade, and revitalize domestic manufacturing," positioning these actions as solutions to economic instability.

The president also suggested shifting regulatory oversight of the banking sector from the Fed to the Treasury Department. However, legal experts argue that such a move would require congressional approval and could face significant resistance.

Implications for the U.S. Economy and the Fed’s Future Moves

The Fed’s decision reflects its balancing act between controlling inflation and maintaining economic growth. By keeping rates steady, it signals confidence in the economy’s resilience but also acknowledges persistent inflationary pressures.

With the next Fed policy meeting scheduled for March, attention now turns to incoming inflation and employment data. If inflation continues to decline, the Fed may consider rate cuts later in the year. However, if price pressures persist or Trump’s economic policies introduce new uncertainties, the central bank may opt for prolonged monetary tightening.

Trump’s public criticism of the Fed highlights a broader debate about the central bank’s role and independence. While his push for lower rates aligns with his pro-growth agenda, the Fed remains focused on its dual mandate—price stability and full employment—without political influence.

As the U.S. heads into an election year, monetary policy decisions will likely become even more contentious. The Fed’s ability to maintain its independence amidst political pressures will be crucial in shaping the trajectory of the U.S. economy.