Interest Rates Are Rising Again - What Should Investors Do?

The Federal Reserve has officially raised interest rates by another 25 basis points, bringing the federal funds target range to 3.75%–4.00%.

And the bigger surprise?

This may not be the last hike.

So rather than asking:

“Are stocks going to crash now?”

I think the more useful question is:

“How should we invest if interest rates stay higher for longer?”

In this article, I’ll cover:

Why rates are rising again
What higher rates actually do to stocks
Which sectors I am paying more attention to
Whether the AI boom is becoming a bubble
What I am personally doing with my portfolio

The Quick Take

If you don’t want to read the entire article, here’s my current view:

I am not panic-selling stocks
I am keeping some cash available
I still want exposure to technology and AI
But I am becoming more selective with expensive growth stocks
I want more diversification outside technology
I am paying much more attention to valuation and cash flow

In short:

Stay invested, but don’t blindly chase whatever has already gone up the most.

Why Are Interest Rates Rising Again?

Inflation isn’t disappearing as quickly as the Federal Reserve would like.

August US CPI increased:

0.4% month-on-month
3.4% year-on-year

The Fed officially targets inflation using the PCE price index, not CPI, but hotter CPI readings are still an indication that price pressures remain.

Energy isn’t helping either.

Oil prices have moved above $100 per barrel amid geopolitical tensions and supply concerns.

Higher oil prices can eventually flow through to:

Transport • Manufacturing • Logistics • Airlines • Consumer goods

At the same time, the US 10-year Treasury yield has moved above 5%.

For stock investors, that number matters a lot.

Why Should Stock Investors Care?

Imagine you have two choices:

Option A: Buy a risky stock and hope it gives you a strong return.

Option B: Buy US government debt yielding around 5%.

When government bonds were paying almost nothing, investors had much more incentive to take risks.

At 5%, the calculation changes.

Stocks don’t suddenly become bad investments.

But investors start demanding more return for taking more risk.

And that can cause stock valuations to fall.

A Simple Example

	Lower Rates	Higher Rates
EPS	$10	$10
P/E investors will pay	35×	28×
Share price	$350	$280

The company earned exactly the same amount of money.

Yet the stock fell:

$350 → $280 = -20%

Why?

Investors simply became less willing to pay 35× earnings.

That is valuation compression.

And it tends to matter more for expensive growth stocks.

So What Should Investors Do?

I don’t think the answer is to sell everything and hide in cash.

Instead, I would focus on a few things.

1. Keep Investing

One Fed meeting should not completely change a long-term investment strategy.

If you’re investing for the next 5, 10 or 20 years, trying to perfectly time every rate decision will probably create more problems than it solves.

2. Keep Some Dry Powder

Cash is much more useful when yields are high.

It also gives you the ability to take advantage of corrections.

If a company I already like falls 20% while its underlying business remains strong, I’d rather have some capital available than be 100% invested beforehand.

3. Focus More on Quality

I’m increasingly interested in companies with:

Strong earnings
Free cash flow
Healthy balance sheets
Sustainable revenue growth
Reasonable valuations

The higher rates go, the less attractive the story of:

“Don’t worry about profits now, we’ll make money eventually.”

Which Areas Am I Watching?

There isn’t a magical sector that always wins when rates rise.

But there are several areas I think are worth researching.

Area	Why I’m Watching It
🏦 Financials & Insurers	Some companies can benefit from higher lending rates and returns on invested assets
🛢️ Energy	Elevated oil prices can support earnings and cash flow
🏥 Healthcare / Defensives	Demand tends to be less sensitive to the economic cycle
🤖 Quality Technology	Strong companies can still grow despite higher rates
💵 Cash / Fixed Income	Higher yields finally make safer assets more attractive

This does not mean every company in these sectors is automatically a good investment.

For example, banks can benefit from higher rates but can also face more defaults and higher funding costs.

And I definitely wouldn’t chase energy stocks simply because oil has already risen.

The point is diversification.

What About AI?

This is probably the most interesting part.

AI spending has become enormous.

Major technology companies are pouring money into:

GPUs • Data centres • Networking • Cloud • Electricity • Cooling

Industry AI-related spending is expected to approach $800 billion in 2026.

That doesn’t automatically mean AI is a bubble.

AI can genuinely change the world and certain AI investments can still become overpriced.

Both can be true.

Remember the dot-com bubble.

The internet wasn’t fake.

The internet went on to completely transform society.

But investors still paid ridiculous prices for many companies simply because they had something to do with the internet.

The technology survived.

Many of the valuations didn’t.

Higher Rates Make the AI Question More Important

When money is cheap, companies can justify aggressive investment more easily.

When rates are high, the hurdle becomes higher.

The question changes from:

“How much can we spend on AI?”

to:

“How much money are we actually making from all this AI spending?”

That is what I think investors should increasingly watch.

For large companies producing enormous amounts of free cash flow, heavy AI spending may be completely manageable.

For highly leveraged companies depending on external financing?

That’s a different story.

My simple way of looking at it is:

Huge AI spending + high rates + weak monetisation = greater valuation risk.

That doesn’t mean stop buying technology.

It means:

Don’t abandon growth. Become more selective about growth.

But Wasn’t the Rate Hike Already Priced In?

Largely, yes.

This is an important concept.

Markets are forward-looking.

Before the announcement, investors already expected a 25 bp hike.

So when the Fed eventually delivered exactly that, the actual rate increase wasn’t completely new information.

What matters more now is:

What happens next?

The Fed has indicated that another increase may still be coming.

That matters much more than simply knowing yesterday’s hike happened.

One additional 25 bp increase is one thing.

A prolonged period of:

high inflation + high Treasury yields + repeated rate hikes

would put considerably more pressure on expensive assets.

What Am I Personally Doing?

I’m not selling my existing investments simply because rates went up.

I already have meaningful exposure to technology and growth, so I also don’t think my solution is to keep adding more and more money into the same theme.

My approach is currently:

📈 Continue My Long-Term Investing

I’m still building long-term equity and ETF positions.

One Fed meeting doesn’t change that.

💵 Keep Cash Available

I don’t feel the need to deploy every dollar immediately.

Having cash gives me flexibility if markets correct.

🤖 Stay Invested in Tech — But Be Pickier

I still believe technology and AI have significant long-term potential.

But I’m increasingly looking at:

earnings • cash flow • balance sheets • valuation

rather than buying something simply because it has “AI” attached to it.

🌎 Diversify

Because I already have significant technology exposure, I’m also looking beyond tech.

Areas I am researching include:

Financials | Energy | Healthcare | Defensive companies

I’m not suddenly rotating my entire portfolio.

I just don’t want the performance of everything I own to depend on one investment theme.

What Am I Watching Now?

I don’t think you need 20 economic indicators open on another monitor.

There are three things I care about most.

1. The Fed

Is there one more hike coming, or several?

2. The US 10-Year Treasury Yield

If yields stay around or above 5%, expensive stocks face a much higher hurdle.

3. AI Monetisation

Companies are spending hundreds of billions.

Eventually, investors are going to ask:

Where is the return?

And I think that question will become increasingly important over the next few years.

Final Thoughts

Higher rates don’t automatically mean:

“SELL EVERYTHING.”

And AI being revolutionary doesn’t automatically mean:

“BUY EVERY AI STOCK.”

My approach is somewhere in between.

Stay invested. Keep some dry powder. Prioritise quality. Diversify. And don’t ignore valuation.

The Fed has already delivered the expected 25 bp hike.

Now the bigger questions are whether rates remain elevated and whether the enormous amount of capital flowing into AI ultimately produces enough earnings to justify today’s expectations.

That’s what I’ll be watching.

Official Sources / Further Reading

Disclaimer

BAM — Bill’s Asset Management

This article is for educational and informational purposes only. Nothing published on BAM constitutes financial advice, an offer to buy or sell securities, or a recommendation of any investment strategy. Always conduct your own research and consider your individual financial circumstances before making investment decisions.