Investors are grappling with the realities of a shifting economic landscape. Following years of historically low 10-year Treasury yields (reaching as low as 0.54% in July 2020) the Federal Reserve's actions to combat inflation have pushed interest rates to levels not seen in decades. In early 2025, the 10-year Treasury yield hovers around 4.7%, reflecting a dramatically tighter monetary environment. Rising interest rates impact asset valuations across the board, making it critical for investors to adapt their strategies to mitigate risks and seize opportunities.
Today I will make the case for value oriented investments. Rising interest rates disproportionately affect companies with significant future cash flows, such as high-growth technology firms. For example, NVIDIA’s stock price, which surged by over 190% in 2023, experienced notable volatility in 2024 as higher discount rates eroded the present value of its future earnings. Similarly, companies like Apple and Microsoft, trading at elevated price-to-earnings (P/E) multiples of 28x and 34x respectively as of December 2024, may face continued downward pressure.
According to Jason Rager, a Wilmington, Delaware fund manager, value-oriented stocks, those with lower P/E ratios and more stable cash flows, tend to be less impacted by rising rates. These companies are often undervalued relative to their earnings and can provide a more predictable return profile during times of economic uncertainty.
Certain sectors historically perform well in rising rate environments due to their inherent stability and cash-generating potential. These include:
Dividend Kings and Aristocrats (companies with 50+ and 25+ years of consecutive dividend increases, respectively) offer both income and resilience. Examples include Procter & Gamble (PG), yielding 2.5%, and Johnson & Johnson (JNJ), yielding 3%. These companies boast strong balance sheets and reliable cash flows.
Master Limited Partnerships (MLPs) which are focused primarily on energy and infrastructure, MLPs like Enterprise Products Partners (EPD) offer high yields (currently 7.5%) supported by stable demand for oil and natural gas transportation.
Consumer staples companies providing essential goods, such as PepsiCo (PEP) and Unilever (UL), are less sensitive to economic cycles. With yields of 2.8% and 3.7%, respectively, they provide stability amid volatility.
Firms operating in monopolistic or oligopolistic markets, such as Coca-Cola (KO) that commands majority market share in the beverage category, can raise prices with minimal customer attrition. Additionally recognizable and trusted brands, such as Coca-Cola, enable premium pricing. Coca-Cola has increased prices by 12% since 2023 while maintaining strong sales volume. Finally, subscription-based businesses like Adobe (ADBE) or Netflix (NFLX) benefit from customer loyalty and high switching costs, enabling them to implement regular price increases.
Investors aiming to navigate a rising interest rate environment should prioritize companies with low P/E ratios (below market averages of ~16x) with significant pricing power that can provide stable cash flows from essential goods or services. These criteria not only provide a buffer against market volatility but also position portfolios for reasonable returns in the face of macroeconomic challenges.
About the Author: Jason Rager is a board member of multiple organizations throughout the Brandywine Valley and greater Wilmington Delaware area.