5 Best Stocks to Buy for a Rising Interest Rate Environment Muhammad Ali Fri, November 13, 2026 at 8:05 AM EST 8 min read MSFT -0.96% BAC +0.67% C +0.94% XOM +0.72% CAT +0.86% Explore stocks on Coinbase Trading disclosure Trading disclosure The above button links to Coinbase. Yahoo Finance is not a broker-dealer or investment adviser and does not offer securities or cryptocurrencies for sale or facilitate trading. Coinbase pays us for certain activity generated through this link. Prices displayed are informational.
After a prolonged run of easing speculation, the interest rate outlook has taken a shift. Back in September, the Federal Reserve increased rates by 25 basis points, and economists are now anticipating another rate hike in December, according to a recent Reuters poll. Bond markets have already reacted to yield curve changes, as the 10-year Treasury yield jumped from 3.97% in February 2026 to 5.31% during the first week of October. It came down to 4.98% by the end of October. Fed's preferred inflation metric, Core PCE, went up by 0.3% during September to its highest reading in a year. Do check Insider Monkey's list of 10 Stocks Analysts Just Downgraded.
Market participants see this as an uncomfortable mix. Elevated interest rates increase the discount rate on projected earnings, which adversely affects the richly valued growth names. They also take a toll on highly leveraged businesses and make bond-like stocks such as utilities and REITs appear less attractive. We recently provided an expanded list of 10 Buy the Dip Stocks Insiders Are Loading Up On After the Recent Market Sell-Off.
But tightening cycles do not necessarily bring bad news for all businesses. Some segments benefit as rates climb, while others carry strong pricing power and balance sheet strength to navigate through them. Insurance players can reinvest their float at relatively higher yields, as indicated by Chubb's CEO in October, who highlighted a direct correlation between operating income and rising rates.
Similarly, Banks have the opportunity to widen the gap between what they earn on loans and what they pay on deposits. With that backdrop, let's explore our 10 Best Stocks to Buy for a Rising Interest Rate Environment.
We provided the expanded list of 10 Best Stocks to Buy for a Rising Interest Rate Environment. The top 5 stocks are listed below.
To identify relevant stocks for this article, we screened U.S.-listed companies that the financial media have tied to the prevailing interest rate backdrop. Also, we only shortlisted stocks with market capitalizations above $2 billion and at least 15% upside potential as of the November 10 closing. From that list, we selected 10 stocks with the most hedge fund investors, using Insider Monkey's Q2 2026 hedge funds database. Finally, we ranked them in ascending order of the number of hedge fund holders.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Insider Monkey's quarterly newsletter's strategy selects 14 small-cap and large-cap stocks every quarter and has returned 599.2% since May 2014, beating its benchmark by 372 percentage points (see more details here).
Number of Hedge Fund Holders: 84
Caterpillar Inc. (NYSE:CAT) was one of the names that held up through the last interest rate hiking cycle back in 2022–23. The stock returned more than 41% between February 2022 and July 2023, indicating that historically it has benefited from a rise in short-term rates. The company's record $78 billion order backlog, following a 96% year-over-year growth, would offer protection in case new orders decline due to rate hikes. Its financial services arm, Caterpillar Financial Services, would also yield higher spreads through repricing of leases, loans and other financing products.
Following the purchase of 1,000 shares by board member James C. Fish Jr. on November 2, for a total consideration of $620,390, Caterpillar made the list of 10 Buy the Dip Stocks Insiders Are Loading Up On After the Recent Market Sell-Off. The purchase increased his reported position in Caterpillar by almost 27%, which now stands at a total of 4,714 common shares.
The stock trades at inflated valuation multiples. The trailing P/E ratio stands at 23.6x, above the forward multiple of 18.8x, which leaves little room for execution error. Additionally, the company faces overcapacity concerns with its ongoing multi-year manufacturing expansion in power generation equipment.
Number of Hedge Fund Holders: 96
ExxonMobil Holdings Corp. (NYSE:XOM) is one of the standout names across the energy sector, which tends to outperform the market following an interest rate rise. The underlying inflation-hedging traits and commodity price dynamics would enable the company to overcome demand weakness that accompanies rate hikes. Additionally, its conservative balance sheet insulates its operations from interest rate vulnerabilities. It ranked #2 in Insider Monkey's recent list of 10 Most Undervalued Dividend Growth Stocks According to Hedge Funds.
The company's cash flow generation capacity remains notable, as it generated $28.3 billion in levered free cash flow over the last twelve months. Supported by robust cash flows through its upstream and downstream operations, this dividend aristocrat has delivered 43 consecutive years of annual dividend growth. It has a 5-year average dividend yield of 3.34%, and at the prevailing level, it offers a forward yield of 2.60%. Given the volatility in crude oil and commodity prices, the company's upstream operations remain vulnerable to lower WTI and Brent prices. This has led to concerns about a potential deceleration in broader earnings over the coming years.
BlackRock is the largest institutional investor with 334.75 million shares, according to the Yahoo Finance database, representing 8.21% of outstanding shares.
Number of Hedge Fund Holders: 102
As a diversified global bank, Citigroup Inc. (NYSE:C) leverages wider spreads between the rates it charges on lending and the ones it pays on deposits. A jump in benchmark rates enables the bank to reprice its new loans and floating-rate assets more rapidly compared to adjustments in deposit costs. This expands the bank's net interest margins.
Citigroup's cash management and institutional functions, including its Services and Treasury operations, benefit from rate hikes. This is due to elevated yields on its float income and cash, along with a higher level of client activity across corporate liquidity management. It was amongst the top banking names according to billionaires, ranking #5 in the list.
Apart from the loan hedges, overall corporate lending revenues have faced compression, exhibiting sequential and annual decline. This can be attributed to weaker loan spreads that have outweighed Citigroup's higher loan balances. With an increase in credit card rewards and partner payment accruals, non-interest income has also contracted sharply, fueling skepticism among investors.
BlackRock is the largest institutional investor with 149.51 million shares, according to the Yahoo Finance database, representing 8.77% of outstanding shares. Other notable institutional names include Vanguard Capital Management and State Street Corporation, which hold 6.29% and 4.57% of outstanding shares, respectively.
Number of Hedge Fund Holders: 111
Bank of America Corp. (NYSE:BAC) is positioned with healthy cash and liquidity reserves, which can be allocated to higher-yielding and shorter-maturity instruments in case the benchmark rates rise. It has been expanding its loan portfolio while enhancing its net interest yield. Its large deposit base offers a low-cost source of funding for the loan portfolio. The stock ranked #5 in our recent list of 10 Best Warren Buffett Stocks with Upside Potential.
Bank of America's short-term assets and massive loan book benefit from rate hikes as they are repriced upward, resulting in billions of dollars in net interest income. It generated close to $41.4 billion in operating cash flow over the past twelve months. Its common equity tier 1 (CET1) ratio of 10.9% stands well above the minimum regulatory requirements.
Bank of America saw its third-quarter adjusted EPS fall short of expectations, clocking in at $0.91 compared to consensus estimates of $1.10. This came at the back of a $1.2 billion regulatory settlement with the U.S. Treasury Department, in relation to violations of anti-money laundering and the Bank Secrecy Act involving some suspicious transactions. The penalty triggered investor class-action lawsuits and also lowered the adjusted EPS by 17 cents a share.
Number of Hedge Fund Holders: 273
A rising interest rate environment benefits Microsoft Corp. (NASDAQ:MSFT) primarily due to its capital deployment leverage, a robust balance sheet, and competitive consolidation within the AI infrastructure space. Additionally, rate hikes add to the debt servicing burden for smaller, highly leveraged competitors and neo-cloud operators, which would enable Microsoft to consolidate its market share.
Microsoft's operating performance remains exceptional. Total revenue over the last twelve months came in at $346.4 billion. Profitability is equally striking as the company has delivered close to a 50% operating margin and more than 41% profit margin on a trailing basis. This has resulted in healthy returns on capital, with return on equity clocking in at 34.22%, signaling operational efficiencies and durable pricing power for Microsoft. Microsoft has been allocating a substantial amount of capital toward AI capabilities. So how does that make its Azure platform integral to the broader growth narrative?
There are some concerns around the company's soaring AI capital expenditure, which has taken a notable hit on underlying free cash flows. The Q1 fiscal 2027 free cash flows went down 27% compared to the corresponding period last year, as cash capex saw more than a twofold jump.
While we acknowledge the risk and potential of MSFT as an investment, we believe certain AI stocks offer greater upside potential and carry less downside risk. If you're looking for an extremely undervalued AI stock that also stands to benefit significantly from Trump-era tariffs and the onshoring trend, see our free report on the best short-term AI stock.
Click to continue reading and see the expanded list of the 10 Best Stocks to Buy for a Rising Interest Rate Environment.
This article is originally published at Insider Monkey.
