Every financial asset is worth the present value of its future cash flows, and the discount rate is what you use to convert those future dollars into today's terms. When interest rates rise, the discount rate rises and the present value of distant earnings falls — which is why rate hikes compress valuations, especially for long-duration growth stocks whose profits sit further in the future.
The formula
Future Cash Flow(1 + Discount Rate)^Years
= Present Value
Why it matters
- —It's the single mechanism connecting central bank policy to stock prices — not sentiment, not opinion, just compounding arithmetic run in reverse.
- —The further out a company's earnings are expected (high-growth, pre-profit businesses), the more its valuation moves when the discount rate changes — this is 'duration' in equities.
- —A rising discount rate doesn't mean a business is doing worse — it means the same future profit is worth less today.
How to read it
| Discount rate rising | Present value of future earnings falls — valuations compress, growth stocks hit hardest |
| Discount rate falling | Present value of future earnings rises — valuations expand, growth stocks benefit most |
| Discount rate stable | Valuation moves driven by earnings changes, not rate changes |