Why Do Growth Stocks Fall More Than Value Stocks When Interest Rates Rise?

Growth stocks are often described as "long-duration assets". It sounds like bond jargon, and it is: the same maths that makes a 30-year bond swing more than a 2-year note explains why high-growth companies drop harder when rates jump.

What people on X are asking

In April 2022 one investor explained that growth stocks that pay most of their cash flows in the distant future are long-duration stocks and underperform when inflation and rates rise. In June 2022 a strategist made the same point, that rising rates weigh on long-duration growth and unprofitable tech while shorter-duration value takes a smaller hit. And in August 2023 a fund manager pushed back, saying higher rates had made supposedly safe stocks riskier and vice versa, and calling the growth-value duration framing too simple.

What people in the thread said

• @TheWiseInvestCA replied that as risk-free rates go up, hurdle rates have to go up too. That is the core of the discount-rate argument below.
• @londoner231 said more than 40% of Russell 2000 companies had negative trailing earnings, so higher capital costs bite. We have not verified that share, but unprofitable firms rely most on future profits and outside funding, which is why they are hit hardest.

These are community comments, summarised in our words; the data and sources below come first.

The fact-checked answer

The discount-rate maths. A stock's value is the present value of all its future cash flows. Raising the discount rate cuts the value of every future dollar, but by much more the further away it is:

Present value of $100, at 2% vs 4% discount rates

Simple annual discounting. Growth companies have more of their expected cash flows in the later rows; mature value companies have more in the early rows and pay dividends now. Tap a column header to sort.

When the $100 arrives	Value today at 2%	Value today at 4%	Change
In 5 years	$90.57	$82.19	−9.3%
In 10 years	$82.03	$67.56	−17.6%
In 30 years	$55.21	$30.83	−44.2%

Why growth sits in the later rows. A fast-growing software or biotech company may earn little today and be valued on profits expected a decade out. A bank, oil producer or utility usually earns most of its value sooner and pays dividends now. When rates rise, the first type loses more value for the same rate change. Unprofitable companies are hit twice: their distant profits are worth less, and the money they need to raise costs more.

What happened in 2022. FRED data show the 10-year Treasury yield rising from 1.52% at the end of 2021 to 3.88% at the end of 2022, peaking at 4.25% in October. Over 2022, the growth-heavy Nasdaq-100 fell about 33%, while the Dow, with more value-style companies, fell about 9%. In the Fama/French research factors published by Dartmouth's Tuck School, the value-minus-growth factor (HML) returned +25.7% in 2022, after +25.6% in 2021 and a record −46.9% in 2020, when rates were near zero.

But not every time. In 2023 the 10-year yield climbed further, to about 4.98% in October, yet the Nasdaq-100 rose about 54% and the Dow about 14%, as earnings expectations for the largest technology companies jumped. The discount rate is only one input; expected profits are the other. That is the fair part of the pushback in the X post above. Our page on how rising 10-year yields affect stocks shows the wider record.

Quick poll

Rates jump 1 percentage point tomorrow. What do you expect to fall most?

• Unprofitable high-growth stocks
• Large profitable tech
• Banks and energy
• Everything equally

Save my answer

What each answer means

• Unprofitable high-growth stocks: Usually right: their value depends most on distant cash and new funding.
• Large profitable tech: Often hit, but strong current earnings soften it.
• Banks and energy: Often hold up better; banks can benefit from higher rates.
• Everything equally: Rarely true; the gap between styles was over 20 points in 2022.

Your answer is stored only in this browser (localStorage). UXS does not collect, count or publish votes, so no totals are shown.

Measuring it. Some investors estimate a stock's equity duration from its expected cash-flow timing; a simpler proxy is valuation. Stocks on very high price-to-earnings or price-to-sales multiples usually have longer duration. See what a good P/E ratio is and whether a PEG below 1 means cheap.

Decision helper

Related reading: what a high-beta stock means, what happens to stocks when the Fed cuts rates and whether a P/B below 1 is a good sign.

Common mistakes

• Treating "growth" and "tech" as the same thing.
• Assuming rising rates always mean growth underperforms.
• Ignoring whether a company is profitable today.
• Switching styles after the move has already happened.

FAQ

What does long duration mean for a stock?

Most of its value comes from cash flows far in the future, so it is sensitive to discount rates.

Why do higher rates hurt growth stocks?

They reduce the present value of distant profits much more than near-term profits.

Did value beat growth in 2022?

Yes. The value-minus-growth factor returned about 26%, and the Nasdaq-100 fell 33% versus 9% for the Dow.

Do growth stocks always fall when rates rise?

No. In 2023 yields rose further but growth stocks rallied on earnings.

Are value stocks safe when rates rise?

Safer on average, not safe; banks and cyclicals carry their own risks.

How can I tell if a stock is long duration?

High valuation multiples and little current profit are the usual signs.