Rising interest rates generally have a cooling effect on stock markets. When central banks increase rates, borrowing becomes more expensive for both businesses and consumers. Companies find it costlier to finance expansions, which can reduce their profits and, consequently, lower their stock prices. Investors often anticipate these profit squeezes and may sell off shares, driving market prices down.

Additionally, higher interest rates make fixed-income assets like bonds more attractive. Investors may shift funds from stocks to bonds, given the safer, reliable returns, which can lead to reduced demand for stocks and further price declines.

Consumer spending, a major driver of corporate revenue, also tends to decrease when rates rise, as loans and credit become more costly. As consumers cut back, companies in sectors like retail and real estate often see diminished sales, impacting their stock performance.

On the other hand, certain sectors, like financials, may benefit because banks and lenders can charge more for loans, improving their profit margins. While rising interest rates typically create downward pressure on the broader stock market, the impact can vary across sectors. Understanding these dynamics is crucial for investors to make informed, strategic decisions in a shifting rate environment.