The link between higher interest rates and stocks just shifted. The Federal Reserve hiked interest rates for the first time since 2023, bringing its goal range to 3.75% to 4%. Now, most investors may be trying to figure out whether another increase is on the way.

They will look at the statement, the projections and any nuance of phrasing from the Fed. They’re looking at the wrong number. The number that matters for stocks is 5%.

That is roughly what investors can now earn from a 10-year Treasury. I have seen what happens when cash and government bonds begin competing seriously with equities. Investors become less forgiving, and businesses that relied on cheap capital are usually the first to be exposed. A 5% yield does not make stocks unattractive. It makes saying no to them much easier.

Why Higher Interest Rates Make Stocks Work Harder For Your Money

For much of the period following the financial crisis, investors had little choice. Cash paid nothing, and bonds offered very little, so money kept moving into equities. Some stocks deserved it. Plenty did not. When almost every sensible alternative produces a negligible return, investors can become remarkably tolerant of high valuations, distant profits and management teams asking to be judged on what might happen several years from now.

An investor can look at a stock, decide the price is ridiculous and collect around 5% while waiting for a better opportunity. There is no pressure to chase the next fashionable theme or pretend that a company priced for perfection is still cheap because its market is growing. Patience used to carry a cost. Today it pays an income.

That changes behavior. When investors are paid to wait, companies should give them a better reason to stop waiting. A good story is no longer enough, particularly when the valuation already assumes that most of the........

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