Reading the Rate Hike in Industrials
What the Fed’s First Hike Since 2023 Means for the Sector
By: Jacob Gaer
30 September, 2026
For the first time in over three years, the Fed has raised rates by 25 basis points to a target range of 3.75%–4.00%. The decision was driven by increased inflation, and the Fed expects an additional 25-basis-point hike before the end of 2026. The increase led to a quick sell-off in industrial names, as rate hikes raise borrowing costs for many customers. Despite this, the outlook for the rest of the year isn’t as negative as you might think. 2026 has been a very interesting year for industrial companies, especially those benefiting from the buildout of AI infrastructure. Fundamentals are strong among most, with substantial remaining performance obligations (RPOs) and efficient conversion to date. However, these companies are facing pressure as higher-than-expected rates raise the question of whether customers will rethink their planned orders. This article analyzes the hike, how it is expected to affect the sector, and what we will likely see in these names come 2027.
The Fed voted unanimously to raise rates in mid-September due to increased inflation driven by tariff costs and high energy prices. Two meetings remain in 2026, scheduled for late October and early December, with expectations for a second hike of the same size before year-end. What’s important is the reasoning behind the hike. Fed projections imply that this is a temporary reaction to inflation, as opposed to the beginning of a rate-hiking cycle. This signals that economic activity is still strong and long-term concerns are limited, which is crucial for industrial demand.
Where the pressure really comes from is long-term rates. The 10-year Treasury yield surpassed 5% just two days before the September rate hike, hitting its highest level since 2007. Despite the similar timing, recent increases in the 10-year yield aren’t as dependent on inflation as changes in the Fed’s policy rate. The increase can largely be attributed to investors demanding higher returns for locking up capital over the long term, likely reflecting growing competition for investor capital. Conceptually, higher rates are damaging to industrial companies because customers have to pay more to finance large projects. However, rate hikes are designed to be used when the economy is running hot, and a strong economy is a key indicator of a strong industrial outlook. This suggests that industrials are currently in a good place. The question becomes how companies can maintain their positioning while entering a less favorable rate environment.
The key differentiator across the sector is who is driving demand and how they’re funding their purchases. When demand comes from customers who rely on cheap borrowing, higher rates are going to hurt. Subsectors like construction and housing are facing exactly this. Total construction spending fell 3.8% year over year in July to its lowest level since October 2023, and homebuilder sentiment dropped to a one-year low in September. These markets need low rates to thrive, and the current outlook presents a challenge for these companies in the short term.
On the other side of the coin, you have subsectors that are still growing because their demand doesn’t depend on cheap borrowing, but rather on big tech names with strong cash flows and credit profiles. When funding is backed by companies like Meta, Google, and Microsoft, higher rates have less impact because these companies aren’t relying on cheap borrowing in the same way the average person does. They have the resources to fund these ventures and the ability to obtain more favorable rates. The urgency of business development in the space also outweighs the benefit of waiting for a better rate environment. Recent examples, like Generac’s deal with Amazon or the increase in GE Vernova’s reservations, show this resilience in the market.
When we look at the market impact, we see an interesting story. Industrials came into the rate hike hot and have had a strong 2026 so far. We’ve seen cooling in the sector over the past month, with its price-to-earnings (P/E) ratio already down from recent peaks. Higher long-term rates and growing investor skepticism around AI spending are hitting valuations across industrial names, whether demand is strong or not. Heading into 2027, the short-term hope for these companies is that earnings growth can continue to outweigh shrinking multiples while inflation begins to cool, bringing cost pressures down. For those subsectors that are hurting right now, easing cost pressures and falling long-term rates will be crucial for a significant turnaround.
Overall, the Fed’s first hike in over three years is certainly a real headwind for the sector, but the impact is uneven. Rate-sensitive subsectors like construction and housing will likely continue to struggle until a larger economic shift occurs, while names tied to AI infrastructure show potential for continued growth as long as earnings can keep up with valuations. Right now, investors should be looking to Q3 earnings reports coming in October as the next test for these companies.