Part 3 · Interest rates: the price of money · Lesson 17
Why do growth stocks hurt more when rates rise?
Even with the same rate hike, growth stocks shake more because of 'when their earnings arrive'.
QToday's question
Rates rose by the same amount, so why do tech stocks fall so much more than other stocks?
When US rates rose quickly in 2022, the Nasdaq lost a third of its value, while the Dow fell by less than 10%. They faced the same rates, so why the big difference? The answer lies in 'when' a company earns its money. In this lesson, we unpack the reason step by step with one calculation tool: present value.
MAPLearning map for this lesson
We build it up in three steps. At the end of each step, a 'Quick check' lets you test your understanding before moving on.
In Lesson 1 we got a first taste of 'stock price = earnings × multiple' and the discount rate. In Lesson 12 you learned that an interest rate is the price of money, in Lesson 14 that market rates such as the 10-year yield price in the future in advance, and in Lesson 15 that longer-maturity bonds swing more with interest rates. This lesson carries that bond logic straight over to stocks.
- STEP 1 · Basic conceptsPresent value and the discount rate
You can calculate , which converts future money into today's value, and explain why the present value of future money shrinks when interest rates rise.
- STEP 2 · Understanding the mechanismThe more distant the earnings, the more sensitive they are
You can compare the earnings paths of and , and show with a calculation why a higher P/E makes a stock swing more with interest rates.
- STEP 3 · Real-world applicationThe Nasdaq and the Dow in 2022
You can confirm the fall of growth stocks during a rate-hiking period using real index data, and pinpoint which part of your portfolio rate news shakes.
STEP 1Present value and the discount rate
Let's start with the question, 'What is future money worth today?' This one calculation is the brick that supports everything else in this lesson.
An easy analogy · do you want it now, or in a year?
If a friend asks, "Do you want KRW 10,000 now or in a year?", most people say now. If you get it now, you can put it in a bank and earn interest. With a deposit rate of 5%, putting in just KRW 9,524 today becomes KRW 10,000 in a year.
Put the other way, KRW 10,000 a year from now is worth KRW 9,524 in today's money. This value, which converts future money into today's value, is called present value. And the higher the interest rate, the less you need to put in today, so the present value of KRW 10,000 in the future gets smaller.
The 5% deposit rate is an example to aid understanding.
A calculation that brings future money back to today
If the compound interest calculation sends today's money into the future, is the reverse calculation that brings future money back to today. The rate you divide by is called the . A easy way to think of the discount rate is 'the return you could have earned if you had put this money somewhere else'.
- In 1 year · 3%KRW 10,000 ÷ 1.03 = about KRW 9,709
- In 10 years · 3%KRW 10,000 ÷ 1.03¹⁰ = about KRW 7,441
- In 10 years · 6%KRW 10,000 ÷ 1.06¹⁰ = about KRW 5,584
For the same KRW 10,000 in 10 years, when the discount rate rose from 3% to 6%, today's value fell by about 25%, from KRW 7,441 to KRW 5,584. The money you will receive in the future hasn't changed by a single won; only the price put on it today has changed. This is the most basic channel through which interest rates move asset prices.
Where does the discount rate come from?
The discount rate used to value stocks can be split into two parts. One is the rate you could earn even by putting money in nearly risk-free government bonds, and the other is the extra amount (risk premium) demanded because stocks are riskier. This total return that investors demand from stocks is called the .
So, as seen in Lesson 14, when the US rises, the market recalculates the future earnings of every stock with a higher discount rate. We can now explain with numbers why Lesson 1 said 'the multiple shrinks when rates rise'.
See it in a chart: when rates rise, distant money shrinks more
Move the discount rate. Each bar is the present value today of KRW 10,000 received anywhere from 1 to 30 years from now. The dotted line is the starting state (discount rate 2%).
Discount rate 2.0%: KRW 10,000 in 1 year is worth KRW 9,804, and KRW 10,000 in 30 years is worth KRW 5,521
Press 'Discount rate 6%'. The KRW 10,000 a year from now shrinks only a little, but the bars for KRW 10,000 in 20 or 30 years drop sharply. When the discount rate rises, the percentage by which today's value shrinks grows the longer the period. That is because the divisor (1 + discount rate) is raised to the power of the number of years.
The US 10-year yields in the presets are rounded values of 1.52% on 2021-12-31 and 3.88% on 2022-12-30 (FRED DGS10). The actual discount rate for stocks adds a risk premium on top.
Quick checkWith a 5% discount rate, what is the present value of KRW 11,025 received in 2 years?
STEP 2The more distant the earnings, the more sensitive they are
In STEP 1 we saw that the more distant the money, the more it swings with interest rates. Now, if we split a company's earnings by 'when the money arrives', it becomes clear why growth stocks hurt more.
Value of a company = sum of the present values of the earnings it will make
Buying a stock means buying a share of the earnings the company will make in the future. So you can think of a company's value as each future earning converted to today's value using the STEP 1 method, then added up.
A company that earns now, a company that earns later
In the stock market, two types are commonly distinguished. A is an established company that earns steadily now and whose stock price is low relative to earnings (low P/E). A has small or no earnings now but has a high P/E because earnings are expected to grow a lot. Software, biotech and new-technology companies are typical examples.
What separates the two companies is 'when they earn' as much as 'how much they earn'. A value stock has a large share of its earnings in the near future, while a growth stock has them far out. As seen in STEP 1, distant money is much more sensitive to the discount rate, so the same rate hike cuts a growth stock's value more.
See it in a chart: comparing the value of two companies
These are the 15-year earnings paths of two hypothetical companies. Raise the discount rate from 3%. With each company's value (sum of the present values of earnings) set to 100 at 3%, compare how much each shrinks.
Steady Bakery Value-stock type · KRW 10 billion every year
Future Robotics Growth-stock type · keeps getting bigger
Discount rate 3.0%: both companies have a value index of 100
When the discount rate is raised to 6%, Steady Bakery's value falls by about 19%, but Future Robotics' falls by about 27%. Even though the total earnings Future Robotics makes over 15 years (KRW 229 billion) are greater than Steady Bakery's (KRW 150 billion), those earnings are concentrated toward the end, so they are cut more by interest rates.
The two companies and their earnings paths are hypothetical examples to aid understanding, and earnings after year 15 are left out to keep the calculation simple.
Stocks have a 'duration' too
In Lesson 15 you learned that a 30-year bond swings far more with interest rates than a 2-year bond. Stocks can be viewed the same way. The 'average recovery time', which weights the timing of earnings by amount, is sometimes called .
In the example above, at a 3% discount rate the average recovery time is about 7.5 years for Steady Bakery and about 11.1 years for Future Robotics. Future Robotics effectively behaves like 'a long-maturity bond'. That is why growth stocks are called 'stocks that resemble long-term bonds'.
Looking again through the multiple (P/E)
'Stock price = earnings × multiple' from Lesson 1 leads to the same conclusion. If we simply assume earnings grow at a constant rate every year forever, the fair multiple can be approximated with the formula below.
A company with high growth expectations (growth rate 5%)
A slow-growth company (growth rate 1%)
With the same 1 percentage point rise in rates, the multiple of the high-growth-expectation company shrank by 25% and that of the slow-growth company by 12.5%. The smaller the denominator (required return − growth rate), that is, the higher the P/E, the more a change in rates shakes the denominator. A high P/E means you have bought a lot of 'distant future expectations', and those expectations are sensitive to interest rates.
The growth rates and required returns are hypothetical examples to aid understanding.
Common misconceptions
- "When rates rise, growth stocks always fall?"
- No. Even if the multiple shrinks, a stock price can rise if earnings grow faster than that. It is a question of which of the two dials from Lesson 1 moves harder.
- "Value stocks are unaffected by interest rates?"
- Value stocks are also the present value of future earnings, so their value falls when rates rise. It's just that their earnings are concentrated in the near future, so they fall less.
- "A stock with a high P/E is a bad stock?"
- A high P/E is only a sign of high growth expectations, not a verdict on good or bad. You do need to know, though, that it swings more with changes in interest rates.
Quick checkWhat is the approximate P/E of a company with a required return of 7% and a growth rate of 3%? And if the required return rises to 8%?
STEP 3The Nasdaq and the Dow in 2022
Did the principle we saw in the calculations also show up in the real market? Let's check with the 2022 US stock market, when rates rose fastest.
The year the three indexes split apart
The US has three benchmark indexes with different characters. The Nasdaq Composite has a high weighting of tech and growth companies, the Dow is made up of 30 long-established blue-chip stocks in finance, health care, industrials and so on, and the S&P 500 sits somewhere in between. In 2022, facing the same rise in rates, the three indexes' results diverged sharply.
The three major US indexes in 2022 (end-2021 = 100) and the 10-year yield, month-end basis
| 2021.12.31 | 2022.12.30 | Change | |
|---|---|---|---|
| Nasdaq Composite | 15,644.97 | 10,466.48 | −33.1% |
| S&P 500 | 4,766.18 | 3,839.50 | −19.4% |
| Dow Jones Industrial Average | 36,338.30 | 33,147.25 | −8.8% |
| US 10-year Treasury yield | 1.52% | 3.88% | +2.36%p |
Source: FRED (NASDAQCOM, SP500, DJIA, DGS10) daily closes and yields; month-end values indexed by Robin Invest. Price basis, excluding dividends. Checked 2026-10-05.
While the 10-year yield rose 2.36 percentage points from 1.52% to 3.88%, the Nasdaq lost a third and the Dow fell by only a little over 9%. In particular, in September–October, when the 10-year yield was nearing 4%, the Nasdaq sank to its lowest levels of the year. Just like Steady Bakery and Future Robotics in STEP 2, the more an stock's earnings are concentrated in the distant future, the more it was cut by the rising discount rate.
Splitting by sector gives the same picture. In 2022, the US technology sector ETF (XLK) fell about 28%, while the financial sector ETF (XLF) fell about 12% (price basis, Yahoo Finance). Why the financial sector fell less is covered in detail in the next lesson.
And when rates turn down
The principle works in the opposite direction too. In 2023, expectations that the Fed's rate hikes were coming to an end grew, and the Nasdaq rose about 43% over the year, from 10,466.48 to 15,011.35. However, a large part of that was also due to earnings forecasts for some large tech stocks being raised sharply on artificial intelligence expectations. The discount rate and earnings expectations were moving at the same time, so it can't be explained by interest rates alone.
Source for 2023 Nasdaq closes: FRED NASDAQCOM (2022-12-30, 2023-12-29). Checked 2026-10-05.
For stocks, this means: reading rate news through duration
| News | Growth stocks (long duration) | Value stocks (short duration) |
|---|---|---|
| "US 10-year yield surges" | Usually a heavy burden The discount applied to distant earnings gets bigger. | Relatively less shaken. |
| "Inflation above expectations, rate cut hopes recede" | Usually − The CPI surprise from Lesson 8 pushes up the discount rate. | Varies by sector (Lesson 18). |
| "Central bank signals cuts, long-term yields fall" | Usually + Hopes for a recovery in the multiple grow. | The gain tends to be relatively smaller. |
| "Demand for new technology explodes, earnings forecasts raised" | Earnings dial + It may even outweigh the interest rate burden. | The impact is limited. |
You can look at your own portfolio with the same eyes. If it holds many stocks with high P/Es and earnings concentrated in the distant future, that portfolio has a 'long duration' and is primed to swing a lot with changes in interest rates. The right weighting depends on each person's goals and time horizon, but at the very least you can know in advance which part of your account rate news will shake. See which direction rates are moving now on the Macro Map, and check your investment's annualized return with the CAGR Calculator.
That is not always the case. Even during a period of rising rates, growth stocks whose earnings grow fast can rise, and even during falling rates, growth stocks can fall if recession worries are large. Duration only tells you 'how sensitive to interest rates'; it does not determine the direction.
Quick checkNews says, "US 10-year yield plunges 0.5 percentage points." Which is likely to react more strongly, the Nasdaq or the Dow?
✓What we learned today
- Present value = future amount ÷ (1 + discount rate)years. At a 3% discount rate, KRW 10,000 in 10 years is worth about KRW 7,441 today, and at 6% about KRW 5,584.
- When rates rise, the present value of all future money shrinks, but the more distant the money, the more it shrinks. KRW 10,000 in 1 year falls by about 3% going from 3% to 6%, while KRW 10,000 in 10 years falls by about 25%.
- A growth stock has much of its earnings far in the future, so its 'equity duration' is long. That is why it swings more with interest rates, like the long-term bonds in Lesson 15.
- Simplified, P/E ≈ 1 ÷ (required return − growth rate). The higher the P/E because of big growth expectations, the more the multiple moves for a 1 percentage point change in rates.
- In 2022, while the US 10-year yield rose from 1.52% to 3.88%, the Nasdaq returned −33.1%, the S&P 500 −19.4% and the Dow −8.8%. However, when earnings grow fast they can even beat interest rates.
Now you know growth stocks hurt when rates rise. So are there, conversely, sectors that welcome higher rates? In the next lesson, we compare sectors whose earnings grow with interest rates, such as banks and insurers, with sectors whose debt burden grows, such as construction and REITs.
Quiz5-question quiz
Pick an answer and it's graded right away with an explanation.
Q1. At a 3% discount rate, the present value of KRW 10,000 in 10 years is about KRW 7,441. If the discount rate rises to 6%, roughly how much will it be?
10,000 ÷ 1.06¹⁰ ≈ KRW 5,584. The money to be received in the future is unchanged, but when the discount rate rose, today's value fell by about 25%.
Q2. When the discount rate rises, which of the following has its present value fall the most (in percentage terms)?
Because (1 + discount rate) is raised to the power of the number of years, the more distant the money, the more it swings with changes in the discount rate. It is the same principle as long-term bonds in Lesson 15.
Q3. What is the main reason growth stocks tend to swing more than value stocks when rates rise?
Growth stocks have a long 'equity duration'. The present value of distant earnings shrinks a lot when the discount rate rises, so their value is cut more even with the same rate hike.
Q4. In the approximation P/E ≈ 1 ÷ (required return − growth rate), what happens to the multiple of a company with an 8% required return and 5% growth rate if the required return rises to 9%?
1 ÷ 0.03 = 33.3x becomes 1 ÷ 0.04 = 25x. That is a much bigger drop than for a company with 1% growth (14.3x → 12.5x, −12.5%). The higher the P/E, the more sensitive to interest rates.
Q5. While the US 10-year yield rose from 1.52% to 3.88% in 2022, which is the correct result for the three indexes?
The Nasdaq, with a high weighting of tech and growth stocks, fell the most, and the Dow, centered on traditional large caps, fell the least. It is an example of rising rates pressing harder on long-duration stocks.
NextTerms · Next lesson · Related tools
The value of money to be received in the future, converted to today's terms by dividing by the discount rate.
Discount rateDiscount rateThe rate used to convert future money into today's value. It is usually set as an interest rate plus a risk premium. The higher the discount rate, the smaller the present value of future earnings.
Interest rateInterest rateThe price of borrowing money. When rates rise, the present value of future earnings falls, which tends to lower stock multiples.
10-year Treasury yield10-year Treasury yieldThe interest rate when a government borrows for a 10-year term. The US 10-year yield is used as a benchmark rate for asset prices worldwide.
Growth stockGrowth stockA stock with a high P/E because earnings, though small now, are expected to grow a lot. A large part of its earnings is in the distant future, so it is sensitive to changes in interest rates (the discount rate).
Value stockValue stockA stock of an established company that earns steadily and whose price is low relative to earnings or assets (low P/E and P/B). Its earnings are concentrated in the near future, so it tends to be less sensitive to interest rates than a growth stock.
Equity durationEquity durationA concept that expresses the average timing at which a company earns its profits, like a bond's duration. The more a stock's earnings are concentrated in the distant future, the longer its duration and the more it swings with changes in interest rates.
Required returnRequired returnThe minimum return an investor expects when putting money into an asset. For stocks it is roughly the Treasury yield plus a risk premium, and is used as the discount rate that converts future earnings to present value.
P/EPrice-Earnings RatioShare price ÷ EPS. A multiple showing how many times one year's earnings the market pays for a share. It varies greatly with interest rates and investor sentiment.
EPSEarnings Per ShareNet income ÷ number of shares outstanding. The profit one share earned in a year.
ValuationValuationThe work of assessing a company's value, or the degree to which a stock price is expensive or cheap relative to earnings and assets. P/E and P/B are the main indicators.
BondBondAn IOU issued by a government or company when it borrows money. It pays set interest and returns the principal at maturity. When interest rates rise, the price of bonds already issued falls.
This is educational material and not investment solicitation. There is no guarantee that past relationships will repeat in the future.