What a Fed Rate Hike Could Mean for These Key Stock Sectors

Going into 2026, one of the catalysts for a continued bull market in stocks was the Federal Reserve cutting interest rates. But now, with the war in Iran bringing inflation concerns back to life, a rate increase is on the table.

While bond traders and analysts price in relatively low odds of a rate hike this year, such a move would ripple through the stock market. “We’ve gone from [talking about] how many cuts will we see from the Fed to [asking if they’ll] raise rates,” says Adam Turnquist, chief technical strategist at LPL Financial. He says that against this backdrop, the stock market would struggle, as investors would likely shift into “risk-off” mode, favoring defensive investments. “Best case would be a choppy market,” he says.

Turnquist and others believe that within the stock market, a wide array of sectors would feel the impact, including financials, real estate, and consumer discretionary stocks.

Oil Stokes Inflation, Sparks Rate Hike Expectations

Just two months ago, investors generally expected the Fed would be cutting rates in 2026, continuing the easing last year that brought the central bank’s target down to a range of 3.50%-3.75% from 5.25%-5.50% in late 2024. Though inflation was holding above the Fed’s 2% target, a slowing jobs market was seen as providing room for one or two cuts.

Then the US war with Iran began on Feb. 28, and oil prices jumped, fanning inflation concerns. Gas prices have risen by 30% on average since the start of the war, and higher diesel, jet fuel, and fertilizer costs could soon ripple through the economy. In response, expectations around the Fed have swung dramatically. According to the CME FedWatch Tool, there is now a 20% chance that the Fed will raise rates in 2026. A month ago, those odds were at zero.

How Rising Rates Affect Stocks

Even unlikely scenarios find expression in the markets. Typically, rising rates are good for banks that are able to earn more money off loans. They’re bad for real estate developers and REITs that need to borrow money. Utilities are also sensitive to interest rates, on the theory that rising rates constrain capital spending plans. Rising rates also reduce household spending, deflate growth stock valuations, and are generally negative for investments that rely on debt financing, including small caps.

Here’s a closer look at how a Fed rate hike could play out across key stock market sectors and industries.

Financial Services

A wide array of companies is included in this sector, but “context matters,” says Sean Dunlop, director of equity research at Morningstar. The sector has already been hit by private credit and artificial intelligence disruption fears. Since the Iran war began, the iShares US Financial Services ETF IYG, which is based on the Dow Jones US Financial Services Index, is down 3.8%, versus a decline of 4.3% for the Morningstar US Market Index. Dunlop assesses how various parts of this sector could fare under higher rates:

• Banks: If the economy is doing well, higher short-term rates are positive because they help widen the net interest margins from which banks make money. But that’s not necessarily the case at the moment, Dunlop says.
• **Life insurers: **These generally benefit from higher yields on the shorter end of the portfolio.
• **Asset managers and investment banks: **Much depends on the behavior of asset prices. “A flat or rising equity market is neutral; a correction is bad,” says Dunlop. Higher rates mute deal activity, equity underwriting, and trading activity. A decline in asset prices also bodes poorly for managers of private assets. And higher rates hit private credit and LBO funds.
• Rating agencies and exchanges: Higher rates are bad for bond issuance, and therefore for rating agencies. But for exchanges, higher short-term rates are “a small net positive” because exchanges earn interest on collateral, says Dunlop.

These are Dunlop’s favored stocks:

• **MarketAxess **MKTX has faced declining market share in US corporate bond trading. But the market isn’t appreciating the strength of its international business, nor the benefit of recent investments and new product rollouts, which will lift operating margins, says Dunlop.
• LPL Financial Holdings LPLA is the preeminent independent US wealth manager, “with underappreciated double-digit growth prospects and a very long runway in a growing market,” says Dunlop. Investors are “overly fixated on recently slower organic asset growth as the firm digests Commonwealth Financial. Adjusting for 2025 integration costs, we forecast 10-year compound annual growth rates of 10.0% for revenue, 10.8% for operating profit, and 13.7% for diluted earnings per share.”
• Blackstone BX is the world’s largest alternative asset manager. Like others in the space, it has been hit by private credit concerns. Yet Blackstone has grown organically despite the more volatile markets of the past five years.

Real Estate and REITs

Since the war began, the iShares Core REIT ETF USRT is down 6.4%, versus 4.3% for the US Market Index. REIT prices generally move inversely with interest rates. Any REIT particularly sensitive to the overall economy will be hurt, explains Kevin Brown, senior equity analyst at Morningstar.

Brown says the name most sensitive to interest rates is Realty Income O, which has positioned itself as “The Monthly Dividend Company,” attracting investors when rates are low. The company also relies on executing billions of dollars in acquisitions each year to fuel overall growth. It executed $9.5 billion in acquisitions at an average return of 7.1% in 2023, well above the average interest rate of approximately 5.0% on the debt it issued to fund those deals. “If rates go up suddenly, that spread gets squeezed over time,” says Brown.

Brown believes that one company that might withstand rising rates relatively well is Ventas VTR. The senior housing REIT “should have strong growth that isn’t tied to rising rates or the economy.” At a recent share price of $81, Ventas trades near Brown’s fair value estimate of $86. “If investors are looking to park money in a safe name that shouldn’t be affected by a rising rate environment, I think that one should continue to do well while most other REITs will decline,” he says.

Consumer Discretionaries

“If I had to categorize the sectors most negatively affected, one is consumer,” says Dominic Pappalardo, chief multi-asset strategist for Morningstar Wealth. “Prices and financing costs will go up as the US consumer is already tired and combating persisting inflation.”

Companies that might suffer in this scenario are higher-end retailers such as Macy’s M or Nordstrom, says Pappalardo. “Typically, Walmart WMT and McDonald’s MCD do better when the economy is slowing down,” he adds.