The New Rates Regime Is a Value Regime

Head of Equity Strategy
Follow Jeff Weniger

We have heard a thousand times that a stock is worth the present value of its future cash flows. But I think no other period in my career has witnessed this concept become so important in the stock market’s calculus as this one.

“High growth stocks such as tech have been pummeled this year as a result of traders adjusting for the higher interest rate environment…”1

I pulled that from the first article I found in a Google search for the keywords “interest rates growth stocks.” 

Rest assured, a sentence like it appears in just about every other daily write-up that discusses the day’s market action.

The S&P 500 Growth Index is down 25% in 2022, a loss far more harrowing than the 8% decline in the S&P 500 Value Index. In the market’s eyes, the primary driver of the performance disparity is the big spike in yields: the 10-Year Treasury note yield has run to 2.82% from 1.50% at 2021’s close.

Figure 1 shows the market’s general reaction.

Figure 1: Growth vs. Value with Interest Rate Moves

Take two hypothetical companies: ValueCo and GrowthCo. 

The former pays a steady dividend, while the latter has no dividend but offers the prospect of a promising future, with rewards that may arrive down the road. 

Consider how we produce a fair stock price for ValueCo. For a chunk of last year, the prevailing default risk-free Treasury yield was around 1%. Add an equity risk premium to it—we will go with 5%—and we can discount ValueCo’s cash flows at 6%.

Figure 2: Discount Rate on ValueCo


Keep it simple. Suppose we anticipate ValueCo will pay a $1 dividend each year to 2033, at which point the firm will be liquidated for $10/share. At that discount rate—6%—our “model” says ValueCo should trade for $13.63 right now.

Figure 3: Valuing ValueCo, 6% Discount Rate

Now play around with interest rates. Say the Treasury rate increases from 1% to 2%, causing the discount rate to change from 6% to 7%. As a result, ValueCo’s stock falls from $13.63 to $12.77. The present value of ValueCo’s future dividends is worth 6.3% less right now because of the new interest rate regime.

A tough situation, but not as bad as what happens to GrowthCo.

Figure 4: Valuing ValueCo, 7% Discount Rate

For GrowthCo, let’s say we anticipate no dividends this decade (because it’s a growth stock) and a one-time event in the future: the company gets bought at a price of $100/share in 2032. Two cash flows: the purchase and the sale. Again, keeping it simple. It looks like this:

Figure 5: A GrowthCo Forecast


Valuing GrowthCo is easy: just discount the $100 to its present value. Using the 6% discount rate, we can say the stock is worth $55.84 today.

Figure 6: Valuing GrowthCo, 6% Discount Rate 

Now change the discount rate from 6% to 7% to account for the higher interest rate regime, as we did with ValueCo. The new present value for GrowthCo drops from $55.84 to $50.83, a 9.0% decline (figure 7).

Recall that when we ran the same exercise on ValueCo, the stock fell by 6.3%.

Figure 7: Valuing GrowthCo, 7% Discount Rate 

The conclusion: Rising interest rates hurt GrowthCo more than they did ValueCo. 

It explains why the relentless collapse in interest rates over the last decade brought fame and fortune to growth stocks. Now that the interest rate regime has turned around, growth stocks are the market’s problem stocks, while value stocks are serving as the haven.

For investors who anticipate a continued march higher in rates, here are some of our U.S. large-cap value strategies that may help if the stock market continues to be upset about it:

For investors interested in these Funds’ performances, you can visit our Fund Compare tool.



1 David French, “Wall Street Up Before Fed Meet as Tech Buying Punctuates Volatile Trade,” Reuters, 5/2/22.

Related Blogs

The Stock Market Threw Its Interest Rate Rules of Thumb out the Window

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WisdomTree U.S. High Dividend Fund

WisdomTree U.S. LargeCap Dividend Fund

WisdomTree U.S. Value Fund


About the Contributor
Head of Equity Strategy
Follow Jeff Weniger
Jeff Weniger, CFA serves as Head of Equity Strategy at WisdomTree. In his role, Weniger helps to formulate the firm’s stock market outlook by assessing macro and fundamental trends. Prior to joining WisdomTree, he was Director, Senior Strategist at BMO, where he worked in the office of the CIO from 2006 to 2017. He served on the firm’s Asset Allocation Committee and co-managed the firm’s ETF model portfolios for both the U.S. and Canada. In 2013, at the age of 32, Jeff was chosen as the youngest member of BMO’s Global Investment Forum, which collected the firm’s top global strategists to formulate the firm’s official long-term outlook for investment trends and markets. Jeff has a B.S. in Finance from the University of Florida and an MBA from Notre Dame. He has been a CFA charterholder and a member of the CFA Society of Chicago since 2006. He has appeared in various financial publications such as Barron’s and the Wall Street Journal and makes regular appearances on Canada’s Business News Network (BNN) and Wharton Business Radio.