10 Best Stocks to Buy for a Rising Interest Rate Environment

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4. ExxonMobil Holdings Corp. (NYSE:XOM)

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 around 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.

3. Citigroup Inc. (NYSE:C)

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.

2. Bank of America Corp. (NYSE:BAC)

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.

That said, 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.

1. Microsoft Corp. (NASDAQ:MSFT)

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 a 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 toll 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.

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