Macro, Interest Rates & Cycles

Introduction

No company operates in a vacuum. Macro conditions — interest rates, inflation, and the economic cycle — powerfully affect valuations and earnings. This lesson explains the key links.

Interest Rates and Valuation

Rising interest rates tend to pressure stocks, especially:

• High-valuation growth stocks (future earnings are discounted more heavily)
• Companies with heavy debt (higher borrowing costs)
• Long-duration assets in general

Inflation

Inflation hurts companies that can't pass rising costs to customers and erodes purchasing power. It can help firms with pricing power that can raise prices.

• Input costs up → margins pressured
• Pricing power = ability to pass on costs

The Economic Cycle

Businesses respond differently to the cycle:

• Cyclical (autos, construction, commodities) — earnings swing with the economy
• Defensive (utilities, staples, healthcare) — demand stays stable in downturns

Rates and the Cost of Debt

Higher rates raise a company's interest expense and refinancing costs, hitting profitability and cash flow — especially for leveraged firms.

Real-World Example

When the central bank raises rates, a highly-indebted growth stock with only future profit promises falls sharply: its future cash flows are worth less today, and its borrowing costs rise. A utility with stable cash flows and pricing power is less affected.

Summary

• Higher rates pressure growth and leveraged stocks
• Inflation hurts firms without pricing power
• Cyclical vs defensive determines sensitivity to the economy
• Rates raise debt costs for leveraged companies
• Always read a company in its macro context

Next Lesson

Now valuation: DCF, the classic intrinsic-value method.