How Will Interest Rates Impact the US Stock Market in 2025?

Interest rates play a crucial role in shaping the stock market. As we move into 2025, investors are closely watching the Federal Reserve’s monetary policy to determine how rate changes will impact different sectors. Remember that it was just recently, last week to be precise, when they decided to keep the interest rates unchanged. However, the make this decision every 6 weeks, so there will be more chances along the year to see interest rates changing in the US.

After covid-19 when interest rates were at their lowest, the inflation started to grow and the Fed had to react to cool down inflation. In 2022 and 2023, the Fed aggressively raised interest rates, leading to stock market volatility. Now, with inflation moderating, many expect rate cuts in 2025, while others warn that rates could remain higher for longer.

On this article we want to explore how interest rates could impact US stocks in 2025, which sectors might benefit, and where risks could emerge, so take notes for whenever this happens.

Why Interest Rates Matter for Stocks

Interest rates influence stock prices in several key ways:

• Cost of Borrowing: Higher rates make borrowing more expensive for businesses, slowing expansion and reducing corporate profits. Lower rates make borrowing cheaper, fueling growth.
• Investor Risk Appetite: When rates are high, bonds and savings accounts become more attractive, leading investors to shift money away from stocks. When rates fall, stocks become more appealing.
• Impact on Valuations: Growth stocks, especially in tech, tend to struggle in high-rate environments because their future earnings are worth less when discounted at higher rates. Lower rates boost their valuations.

So simplifying, if people is offered a saving account with 5%-6% interest, they do prefer to keep their money in there rather than investing. However, those high interest rates for companies means that new debt that they are taking will be at a higher rate so they may decide to invest less.

Will the Fed Cut Interest Rates in 2025?

Current Interest Rate Trends

As of early 2025, the Federal Reserve’s benchmark interest rate sits at its highest level in over two decades, following a series of rate hikes between 2022 and 2023. Inflation has been cooling, but it remains above the Fed’s 2% target, making future rate decisions uncertain.

Many analysts predict that the Fed will start cutting rates in mid-to-late 2025, but this depends on several factors:

• Inflation Levels – If inflation continues to decline, the Fed may ease rates to stimulate economic growth.
• Economic Growth – A slowdown in job growth or GDP could push the Fed toward rate cuts.
• Global Economic Factors – Economic weakness in China or Europe could influence the Fed’s decisions.

Scenarios for 2025

• Scenario 1: Rate Cuts (Bullish for Stocks) – If the Fed cuts rates, stocks—especially tech and growth sectors—could see a strong rally. Bear in mind that investors tend to anticipate this. For example, if there is already inflation and economic improvements, we could guess that a rate cut might be coming, so the rally happens at those stages.
• Scenario 2: Rates Stay High (Mixed Impact) – If inflation remains sticky, the Fed may hold rates steady, which could limit stock market gains.
• Scenario 3: More Rate Hikes (Bearish for Stocks) – If inflation unexpectedly spikes, the Fed could raise rates again, causing stock prices to drop.

How Different Sectors Will Be Affected With Interest Rates Changes

1. Technology Stocks (NASDAQ-100)

Tech stocks, including giants like Apple (AAPL), Microsoft (MSFT), and NVIDIA (NVDA), tend to perform well in low-interest-rate environments because:

• Their high valuations rely on future earnings, which look better when discounted at lower rates.
• Cheaper borrowing makes it easier for tech firms to invest in innovation.

If the Fed cuts rates in 2025, the NASDAQ could see a significant rebound, making tech stocks a strong buy.

2. Financial Stocks (Banks, Insurers, Fintech)

• Banks like JPMorgan Chase (JPM) and Bank of America (BAC) benefit from higher rates because they earn more from loans. However, if rates fall, bank profit margins may shrink so they could go the other way around.
• Insurance companies like AIG and Prudential Financial thrive on higher bond yields, which could decline with rate cuts.

If rates drop, fintech firms like PayPal (PYPL) and Block (XYZ) could benefit from increased consumer spending and borrowing.

3. Real Estate Investment Trusts (REITs)

REITs struggled during the high-rate environment of 2022-2024 because rising rates increased borrowing costs. However, in 2025:

• Lower rates would reduce financing costs, helping REITs recover.
• Sectors like commercial and residential real estate could see renewed demand.

Top REITs to watch include Realty Income (O), Simon Property Group (SPG), and Prologis (PLD).

4. Consumer Discretionary Stocks

Retail and consumer spending stocks—such as Amazon (AMZN), Tesla (TSLA), and Nike (NKE)—are highly sensitive to interest rates.

• Lower rates encourage more spending, boosting these companies.
• If rates stay high, consumers may cut back on discretionary purchases.

5. Energy Stocks (Oil & Gas)

Energy stocks, like ExxonMobil (XOM) and Chevron (CVX), are less sensitive to interest rates and more tied to oil prices.

• If economic growth slows due to high rates, oil demand could weaken, hurting energy stocks.
• If rates fall and growth picks up, oil stocks may benefit.

6. Dividend Stocks (Utilities & Defensive Sectors)

• Utilities and consumer staples (e.g., Procter & Gamble, Coca-Cola, Johnson & Johnson) tend to perform well in high-rate environments because they offer steady income.
• If rates fall, their dividend yields may become less attractive compared to riskier growth stocks.

How Should Investors Prepare?

1. Diversify Across Sectors

Since rate decisions are uncertain, holding a mix of tech, financials, and defensive stocks can help balance risk.

2. Watch for Key Economic Indicators

• Inflation Reports – A faster decline in inflation could push the Fed toward rate cuts.
• GDP Growth & Unemployment Data – Weak economic data may signal upcoming rate reductions.

3. Consider Bond Investments

• If rates fall, long-term bonds could offer capital appreciation.
• If rates stay high, short-term bonds may be a better hedge.

4. Be Cautious with High-Growth Stocks

If rates stay high, overvalued tech stocks could struggle. Focus on companies with strong profitability and cash flow rather than speculative bets.

To remember

Interest rates will play a critical role in shaping the US stock market in 2025. While many expect rate cuts, inflation and economic data will ultimately determine the Fed’s decisions.

• If rates fall, expect a rally in tech, REITs, and consumer stocks.
• If rates stay high, defensive stocks, banks, and energy may perform better.
• If rates rise again, expect market volatility and pressure on high-growth sectors.

For UK investors looking to enter the US stock market, understanding these interest rate dynamics is crucial. Diversifying investments, staying informed on Fed policy, and adjusting portfolios accordingly will help navigate market uncertainty in 2025.