{"id":42258,"date":"2026-05-17T00:07:57","date_gmt":"2026-05-16T16:07:57","guid":{"rendered":"https:\/\/www.granitefirm.com\/blog\/us\/?p=42258"},"modified":"2026-05-17T00:20:42","modified_gmt":"2026-05-16T16:20:42","slug":"stock-rise-as-fed-cuts-rate","status":"publish","type":"post","link":"https:\/\/www.granitefirm.com\/blog\/us\/2026\/05\/17\/stock-rise-as-fed-cuts-rate\/","title":{"rendered":"Why stock rise as Fed cuts rates?"},"content":{"rendered":"\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_83 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #ffffff;color:#ffffff\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #ffffff;color:#ffffff\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2026\/05\/17\/stock-rise-as-fed-cuts-rate\/#Background_of_this_article\" >Background of this article<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2026\/05\/17\/stock-rise-as-fed-cuts-rate\/#Rates_and_Treasury_Yields_Positively_Correlated\" >Rates and Treasury Yields Positively Correlated<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2026\/05\/17\/stock-rise-as-fed-cuts-rate\/#Mary_Buffetts_Explanation\" >Mary Buffett&#8217;s Explanation<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2026\/05\/17\/stock-rise-as-fed-cuts-rate\/#Company_Value_Reflects_Market_Interest_Rates\" >Company Value Reflects Market Interest Rates<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2026\/05\/17\/stock-rise-as-fed-cuts-rate\/#DCFs_discount_rate_must_reflect_rates\" >DCF&#8217;s discount rate must reflect rates<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2026\/05\/17\/stock-rise-as-fed-cuts-rate\/#Stock_valuation_is_closely_related_to_rates\" >Stock valuation is closely related to rates<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2026\/05\/17\/stock-rise-as-fed-cuts-rate\/#Apple_Stock_and_Treasury_Bonds\" >Apple Stock and Treasury Bonds<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2026\/05\/17\/stock-rise-as-fed-cuts-rate\/#Apple_overvalued_as_treasury_yields_raised\" >Apple overvalued as treasury yields raised<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2026\/05\/17\/stock-rise-as-fed-cuts-rate\/#Buffetts_Reaction\" >Buffett&#8217;s Reaction<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2026\/05\/17\/stock-rise-as-fed-cuts-rate\/#Closing_words\" >Closing words<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-11\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2026\/05\/17\/stock-rise-as-fed-cuts-rate\/#Related_articles\" >Related articles<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Background_of_this_article\"><\/span>Background of this article<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Previously, to help general readers and investors more easily understand the relationship between the Federal Reserve&#8217;s interest rate policy and stock prices, I published two posts on my blog: &#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/03\/14\/stock-prices-vs-inflation\/\">Why do stock prices automatically rise with inflation?<\/a>&#8221; and &#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2024\/08\/13\/market-rise-after-rate-cut\/\" target=\"_blank\" rel=\"noreferrer noopener\">Will Fed rate cut gurantee stock market rise?<\/a>&#8221; I&#8217;ve received some responses in recent years.<\/p>\n\n\n\n<p>While the previous post was relatively concise and easy to understand, this post will further explain the relationship between the Federal Reserve&#8217;s interest rate policy, stock prices, and government bond yields in greater depth, to help you understand why stock rise as Fed cuts rates?<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Rates_and_Treasury_Yields_Positively_Correlated\"><\/span>Rates and Treasury Yields Positively Correlated<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Central bank interest rates and government bond yields are highly positively correlated. Their interaction reflects market funding costs and expectations for the overall economy. When a central bank raises its benchmark interest rate, government bond yields usually follow suit; however, government bond yields are determined by bond market prices, making the two inversely related.<\/p>\n\n\n\n<p>Positive Linkage Between Benchmark Interest Rates and Government Bond Yields Impact of Central Bank Policy: Benchmark interest rates (such as the US Federal Funds Rate) are the basis for all interest rates. When central banks raise interest rates, bank borrowing costs increase, the risk-free interest rate rises, and the issuance rate and market trading yield of government bonds also rise accordingly. When deposit or short-term bill rates are higher, market funds flow to high-yield assets, prompting investors to demand higher returns for holding government bonds, thus pushing up government bond yields.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Mary_Buffetts_Explanation\"><\/span>Mary Buffett&#8217;s Explanation<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Mary Buffett used two examples in her book<a href=\"https:\/\/www.amazon.com\/New-Tao-Warren-Buffett-Decisions\/dp\/1668061147\" target=\"_blank\" rel=\"noopener\"> <em>The New Tao of Warren Buffett<\/em><\/a> to illustrate this. I believe her explanation is very clear, and I quote excerpts below:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Company_Value_Reflects_Market_Interest_Rates\"><\/span>Company Value Reflects Market Interest Rates<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Suppose Company A consistently generates $10 million in earnings annually. In a world with a 10% interest rate, we must invest $100 million in bonds with a 10% interest rate to earn $10 million annually. This means that at a 10% interest rate, Company A&#8217;s market value is $100 million. ($100 million \u00d7 10% = $10 million)<\/p>\n\n\n\n<p>Now suppose the interest rate drops to 2%. We must invest $500 million in bonds with a 2% interest rate to earn $10 million annually. ($500 million x 2% = $10 million) This means that Company A, which generates $10 million in annual income at a 2% interest rate, is currently worth $500 million in the market.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"DCFs_discount_rate_must_reflect_rates\"><\/span>DCF&#8217;s discount rate must reflect rates<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The same inverse relationship applies to discounting a company&#8217;s future cash flows to their present value: the higher the discount rate, the lower the present value; the lower the discount rate, the higher the present value. For example, earning $10 million annually for the next ten years, with a discount rate of 10%, yields a present value of $61.3 million. However, if the discount rate is 2%, the same cash flow has a present value of $89.4 million.<\/p>\n\n\n\n<p>If interest rates fall, the relative value of a company&#8217;s future earnings will increase, and the stock price will eventually rise accordingly. Conversely, if interest rates rise, the relative value of a company&#8217;s future earnings will decrease, and the stock price will eventually fall accordingly.<\/p>\n\n\n\n<p><strong>Note<\/strong>: For information on discounted cash flow (DCF), please refer to my previous post of &#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/10\/11\/dcf-calculator\/\">DCF (Discounted Cash Flow) Calculator<\/a>&#8220;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Stock_valuation_is_closely_related_to_rates\"><\/span>Stock valuation is closely related to rates<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Apple_Stock_and_Treasury_Bonds\"><\/span>Apple Stock and Treasury Bonds<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>For Buffett, the valuation of all investments is closely related to interest rates. If you own one share of Apple stock, and it earns $6.43 per share in 2023, you would need to invest $128 ($=6.43\/0.05) in government bonds with a 5% interest rate to earn the same $6.43. However, if the government bond interest rate is only 1%, you would need to invest $643 in government bonds with a 1% interest rate to achieve the same $6.43 return.<\/p>\n\n\n\n<p>Therefore, when interest rates fall, stock prices &#8220;tend&#8221; to rise; and when interest rates rise, stock prices &#8220;tend&#8221; to fall.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Apple_overvalued_as_treasury_yields_raised\"><\/span>Apple overvalued as treasury yields raised<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Why look at government bonds? Because if they are bonds issued by the U.S. Treasury, the market will perceive them as having no default risk. In 2024, the yield on 10-year U.S. Treasury bonds was 4.3%. Based on this, Apple&#8217;s earnings per share of $6.43 were estimated to have a relative value of $149 ($6.43\/0.043). Apple&#8217;s stock price reached an all-time high of $225 in 2024, 66% higher than this relative value of $149 per share.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Buffetts_Reaction\"><\/span>Buffett&#8217;s Reaction<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Buffett&#8217;s reaction to this perceived overvaluation was to begin selling his Apple stock. Even the best companies can be overvalued, and Buffett typically reduces his holdings in such cases.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Closing_words\"><\/span>Closing words<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>In the long run, one of the most significant variables affecting valuation is clearly interest rates. If interest rates are destined to remain very low\u2026 this will make any income stream generated by an investment more valuable.<\/p>\n\n\n\n<p>In a Q&amp;A session at Berkshire Hathaway&#8217;s 2015 shareholder meeting, Buffett stated, &#8220;When the yield on government bonds is only 1%, the value of corporate earnings is obviously much higher than when the yield on government bonds is 5%.&#8221;<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"122\" height=\"80\" src=\"https:\/\/www.granitefirm.com\/blog\/us\/wp-content\/uploads\/sites\/2\/2026\/05\/stock-rise-as-Fed-cuts-rate-Custom.jpg\" alt=\"stock rise as Fed cuts rate\" class=\"wp-image-42266\"\/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Related_articles\"><\/span>Related articles<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/03\/14\/stock-prices-vs-inflation\/\">Why do stock prices automatically rise with inflation?<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2024\/08\/13\/market-rise-after-rate-cut\/\" target=\"_blank\" rel=\"noreferrer noopener\">Will Fed rate cut gurantee stock market rise?<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/10\/11\/dcf-calculator\/\">DCF (Discounted Cash Flow) Calculator<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2025\/09\/20\/indicators-interpret-market\/\">Indicators helps to interpret the direction of stock market and economic climate<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.bing.com\/search?pglt=299&amp;q=US+credit+rating+downgrade+by+Fitch%2C+the+reasons+and+implications&amp;cvid=a98b4c4ac7554a71b331287330439829&amp;gs_lcrp=EgRlZGdlKgYIABBFGDkyBggAEEUYOTIHCAEQ6wcYQNIBBzgzN2owajGoAgCwAgA&amp;FORM=ANSPA1&amp;PC=CNNDDB\" target=\"_blank\" rel=\"noopener\">US credit rating downgrade by Fitch, the reasons and implications<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/09\/29\/inflation-and-rate\/\">Tax, inflation and rate are the top three serious killers to investors<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/09\/19\/us-inflation-rate-querier\/\" target=\"_blank\" rel=\"noreferrer noopener\">Querier of US Inflation Rate<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/12\/27\/inflation-reduction-act\/\">The impact of the Inflation Reduction Act on US stocks<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/06\/12\/inflation-proof-investments\/\">Inflation-proof investments<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/12\/27\/inflation-reduction-act\/\">The impact of the Inflation Reduction Act on US stocks<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/06\/26\/gdp-and-stock-prices\/\">The relationship between GDP and stock prices<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/09\/29\/us-gross-domestic-product-gdp-querier\/\">US Gross domestic product (GDP) querier<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/07\/04\/how-investors-should-look-at-economic-trends-and-forecasts\/\">How investors should look at economic trends and forecasts?<\/a>&#8220;<\/li>\n<\/ul>\n\n\n\n<p><em><strong>Disclaimer<\/strong><\/em><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><em>The content of this site is the author\u2019s personal opinions and is for reference only. I am not responsible for the correctness, opinions, and immediacy of the content and information of the article. Readers must make their own judgments.<\/em><\/li>\n\n\n\n<li><em>I shall not be liable for any damages or other legal liabilities for the direct or indirect losses caused by the readers&#8217; direct or indirect reliance on and reference to the information on this site, or all the responsibilities arising therefrom, as a result of any investment behavior.<\/em><\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>This post will further explain the relationship between the Federal Reserve&#8217;s interest rate policy, stock prices, and government bond yields in greater depth, to help you understand why stock rise as Fed cuts rates?<\/p>\n","protected":false},"author":1,"featured_media":42266,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[407,405,343],"tags":[],"class_list":["post-42258","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-interest-rate","category-inflation","category-stock-valuation"],"_links":{"self":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/42258","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/comments?post=42258"}],"version-history":[{"count":6,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/42258\/revisions"}],"predecessor-version":[{"id":42269,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/42258\/revisions\/42269"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/media\/42266"}],"wp:attachment":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/media?parent=42258"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/categories?post=42258"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/tags?post=42258"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}