Cost of Borrowing: Interest rates can impact the cost of borrowing for companies, which can affect their profitability and earnings. When interest rates are high, companies may have to pay more to borrow money, which can result in reduced earnings and lower stock prices. Conversely, when interest rates are low, companies can borrow money at a lower cost, which can boost earnings and lead to higher stock prices.
Investment Alternatives: Interest rates can also impact investment alternatives to the stock market, such as bonds or savings accounts. When interest rates are high, these alternative investments can be more attractive to investors, which can result in a shift away from the stock market and towards bonds or savings accounts. This can lead to lower stock prices. Conversely, when interest rates are low, the stock market can become more attractive to investors looking for higher returns, which can lead to higher stock prices.
Economic Growth: Interest rates can impact economic growth, which can in turn impact the stock market. When interest rates are low, it can stimulate economic growth by making borrowing cheaper and more attractive to businesses and consumers. This can lead to increased spending and investment, which can boost corporate earnings and drive up stock prices. Conversely, when interest rates are high, it can slow down economic growth and reduce corporate earnings, which can lead to lower stock prices.
