What is the relationship between stocks and interest rates?

In stock market news, the rise and fall of policy interest rates by central banks (the Bank of Japan in Japan) is an important topic.
Let’s organize the relationship between stock prices and policy interest rates.

So, I have summarized “interest rates” once again.

What we can understand from this is:

Policy interest rates rise
　　　👇
Interest rates at general banks also rise
　　　👇
Companies refrain from borrowing
　　　👇
Corporate activity slows down and profits decrease
　　　👇
Stock prices fall

Conversely:

Policy interest rates fall
　　　👇
Interest rates at general banks also fall
　　　👇
Companies find it easier to borrow
　　　👇
Corporate activity becomes active and profits grow
　　　👇
Stock prices rise

That is the logic, but in reality,
stock prices react immediately just by the announcement that policy interest rates will change.
No,
they can even be affected by the mere expectation that interest rates will change.
・・・
This is because investors are looking ahead.

When the market expects that “interest rates will rise,” stock prices fall,
and sometimes after the announcement of an interest rate hike, stock prices rise as it is “already priced in.”
What is that all about!

In the U.S., the policy interest rate reached 5.5% in 2023 during the rate hike cycle that began in 2022, and high interest rates continued through 2024, but
in the autumn of 2023, stock prices and the S&P 500 index began to rise due to expectations of a pause in rate hikes and future rate cuts.
(Of course, there was also an increase in corporate earnings due to the rise of generative AI, like NVIDIA.)
After that, stock prices climbed steadily with every FOMC (Federal Open Market Committee) meeting due to expectations of rate cuts.

On the other hand, in Japan, which moved toward rate hikes starting in 2024,
the rate went from 0% to 1.25% by September 2026, which is gradual and still a low interest rate, so the impact on the strong stock market seems minimal.
Furthermore, bank stocks, which see increased profits from rising interest rates, are performing well.
However, since inflation is progressing, further rate hikes seem unavoidable, so is it likely to be a drag on stock prices?

Of course, it is true that additional rate hikes while inflation continues in Japan are likely to weigh on overall stock prices through factors such as increased corporate borrowing costs.

However, what we must not forget here is
“the essence of inflation and stocks.”
When inflation occurs, the real value of cash and government bonds decreases.
On the other hand, excellent companies can raise product prices in line with inflation (price pass-through) and expand their sales and profits in nominal terms.
In other words, in an inflationary environment, holding real assets in the form of intangible “companies (stocks)” has a defensive advantage over cash and bonds is an aspect of this.

In fact, while funds are gathering in the banking sector, which benefits from rising interest rates, stocks without accompanying performance are being sold off, and the market is showing an increasingly “selective” nature.

Instead of simply bracing for “rising interest rates = immediate stock price decline,”
“Which companies can overcome inflation and increase profits?”
For investors who look ahead, the current market environment may be an extremely interesting phase where the true strength of companies is tested.

For example,
even in the real estate industry, where it is expected that sales will fall due to higher loan interest rates and restrained buying caused by rising interest rates,
companies that are increasing profits through business diversification might be a “buy.”
(Personally, I haven’t had much luck with them so far…)

Even if interest rates rise,
hyperscalers
are issuing corporate bonds with high interest rates to raise funds for capital investment.
They must be in a gung-ho mood, thinking they have to win the AI hegemony race,
but it’s a make-or-break situation…
This is also a point to ponder whether to get on board or pass.