Best Stocks If 3% Is the New 2%: Invest for Higher Rates

The priciest mistake: investing like it’s still a 2% world

If there’s one error that quietly drains the most money, it’s anchoring your portfolio to yesterday’s inflation and rate regime. It’s Q4 2025. Higher-for-longer isn’t a headline anymore, it’s the baseline. I still hear stock pitches that assume cash is free, inflation slides back to 2% on autopilot, and duration risk is someone else’s problem. That worked in the 2010s. It’s a leak in your P&L today.

Quick reality check. The policy rate lived at 0-0.25% for seven years after the GFC (2008-2015) and again in 2020-2021. CPI inflation averaged about 1.8% from 2010-2019 (BLS). That regime made long-duration growth easy to love and balance-sheet slop…forgivable. Then the world changed. Three‑month T‑bill yields hovered near 0% for most of the 2010s; in 2024 they were around 5% for much of the year (Treasury data), and this year they’ve spent most months north of ~4.5%. Investment‑grade corporate yields that were roughly ~2.2% in 2021 (ICE BofA index level) ran near the mid‑5s in 2024 and remain elevated in 2025. Different math, different winners.

And math is really the point. When money isn’t free, two things bite: valuations and timing.

• Valuations: The S&P 500 has spent long stretches of 2024-2025 trading around the high‑teens to ~20x forward earnings (FactSet-style estimates). That’s fine if your discount rate is 6%. If it’s 9%, not so fine.
• Cash‑flow timing: A $1 cash flow arriving in 10 years is worth ~$0.51 at a 7% discount rate, but only ~$0.42 at 9%, an ~18% hit without the company changing a thing. Long-duration stories pay the tax first.
• Debt costs: Refinancing at +300 bps versus 2021 can turn “EBITDA covers interest 6x” into 3-4x fast. That compresses optionality, fewer buybacks, fewer growth bets, more covenant watching.

It isn’t 2019 anymore. Your opportunity cost got a raise.

When T‑bills pay you ~4-5%, every equity has to beat a higher hurdle. That doesn’t mean “sell stocks.” It means stock selection has to be sharper: real cash generation over “total addressable market” slides, balance sheets that can refinance without shredding margins, and business models with pricing power that holds in a 3%‑ish inflation world, if 3% really is the new 2% (and yes, reasonable folks can debate that).

Here’s what you’ll get from this piece: how to reframe equity valuation when the risk‑free rate actually pays you, which sectors and balance‑sheet setups tend to work in a higher-carry market, and a simple way to sanity‑check duration risk in your portfolio. I’m not pretending it’s simple, markets rarely are, but ignoring the regime shift is the expensive choice. And I’ve made my share of expensive choices; no halo here.

What “3 is the new 2” actually means for stocks

Here’s the translation from slogan to portfolio mechanics. If headline inflation settles closer to ~3% instead of 2%, and real yields stay positive and elevated, equity math changes. Not a catastrophe; just a different gravity. Since last year, 10‑year TIPS real yields have mostly lived around ~1.7-2.3% (they peaked near 2.5% in late 2023). That’s a big break from the 2010s, when real yields spent long stretches below 1% and often near zero. With that backdrop, multiples, margins, and who actually wins all shift.

• Equity duration matters again. Long-dated growth cash flows get discounted harder when real yields are ~2% instead of ~0%. Quick intuition: the duration of a growing perpetuity is roughly (1+r)/(r−g). If r=7% and g=3%, duration ≈ 25 years; bump r to 9% with the same g, duration drops to ~17 years and the PV takes a step down. That’s why software names with cash flows heavily back‑loaded, early-stage biotech, and pre-scale consumer platforms feel every 50 bps in real yields, while cash‑rich, near-term generators wobble less.
• Pricing power and indexation get more valuable. In a 3% inflation world, the ability to pass through price, ideally through contracts, is gold. Think CPI or PPI indexation in infrastructure concessions, certain defense and aerospace contracts, or industrial distributors that price off producer costs with lags. Even simple lease escalators matter: many industrial REITs have fixed 3%+ annual bumps or CPI‑linked clauses, which helped reported same‑store NOI growth outpace inflation during 2022-2024 periods when CPI ran hot. If inflation doesn’t glide to 2%, that embedded ratchet is a real asset, not just legal boilerplate.
• Capex-heavy businesses can win, if ROIC clears the new hurdle. The hurdle rate isn’t theoretical anymore. With front-end rates paying you 4-5% this year and 10‑year real yields ~2%, after-tax WACC for many firms now starts with a 7-9 handle, not 5-6. Data centers, leading-edge semis, transmission and midstream, high-return specialty chemicals, these can still compound if steady-state ROIC stays comfortably above WACC and balance sheets aren’t stretched. The trap is vanity capex: low-visibility projects with ROIC that looks fine in a slide deck and lousy after refinancing at SOFR+300.

My take, subject to change because markets love to make us all eat crow, is that the market is still repricing path risk: the path of real yields. When the 10‑year real pops 25-40 bps in a month, durationy equities rerate before anyone updates their models. That’s not a signal your business is broken; it’s the math of discounting working on you in real time.

So where does that leave a practical investor looking for the best-stocks-if-3-is-new-2? I’d tilt toward: (1) businesses with visible near-term cash generation and balance sheets that can refinance without torching margins; (2) companies with explicit indexation or credible pricing power in concentrated niches; (3) capex deployers with proven ROIC > WACC through cycles, not just in good quarters. And yes, I still own a couple of high-duration names, just sized smaller, with the understanding that a 25 bps real-yield move can tax my P&L. Humility is cheaper than hope.

In short: higher real yields compress duration premia, 3% inflation elevates the value of indexation, and capex isn’t dead, subpar ROIC is.

Traits to prioritize: how to spot winners in a 3% world

Alright, brass tacks. In a world where headline inflation refuses to die (call it ~3% year-over-year through much of 2025) and real yields stay positive, the 10-year TIPS has lived roughly in the 1.8%-2.3% range this year, equity math changes. Duration gets taxed, indexation gets rewarded, and balance sheets matter again. My take: prioritize businesses that turn pricing power and near-term cash into compounding, without handing it all back to bondholders at refinancing.

• Sustainable pricing power: You want oligopolies, must-have products, or regulated pass-throughs. Think: medical device consumables with high switching costs, specialty chemicals with customer lock-in, payment networks that price by basis points, and regulated utilities with formula rates that explicitly adjust for inflation. In plain English: if CPI runs 3% and your top line can rise 3-4% without volume falling off a cliff, you’re playing offense while others play defense. I like businesses where at least 30% of revenue is contractually indexed (CPI, PPI, or escalators of 2-3% baked in). And yes, pipes and wires, midstream and regulated T&D, often have that baked right into their tariffs.
• Shorter cash-flow duration: Near-term earnings, not promises for 2036. Quick back-of-envelope: a 10-year, level cash-flow stream “duration” is roughly ~7 years. A 40 bps rise in real yields can compress present value by ~7 x 0.4% ≈ 3%. Stretch that to a story stock with 80% of value beyond year 7, and the hit is multiples of that before anyone edits the slide deck. I prefer companies where >70% of intrinsic value sits inside the next 7-8 years of cash flows; you feel real-rate moves less, you sleep more.
• Strong balance sheets: Fixed-rate, well-termed debt; net cash where possible. As of 2025, corporate refi coupons are still running 100-250 bps higher than 2020-2021 vintage paper, depending on credit. If 80% of your stack is fixed with a 6-8 year weighted-average maturity, you can ladder into that reality without torching margins. As a rule of thumb I use on the desk: net debt/EBITDA ≤ 1.5x and interest coverage ≥ 8x in base case. Not religious doctrine, just guardrails. And yes, cash earns something again; idle cash at 4%-5% short rates cushions.
• Dividend growth over high yield: In a 3% inflation world, a 7% yield that never grows loses purchasing power. A 2%-3% yield growing 6%-8% annually preserves it. Historically, dividend growers have outperformed over full cycles; the mechanism now is simple, steady hikes usually signal pricing power and capex discipline. If management can raise the dividend 5-10% in 2025 without cooking the payout ratio, they’re probably managing price and costs well.
• Variable or indexed revenue: CPI-linked contracts, floating-rate assets, cost-plus models. Examples: defense programs with cost-plus/fixed-fee frameworks, infrastructure concessions with CPI+ escalators, insurance pricing that reprices annually (with the caveat of loss-cost volatility), and banks with a heavy mix of floating-rate C&I/HELOC balances. The trick is net exposure: floating-rate assets are only a win if your funding isn’t more floating than your assets. I look for positive rate sensitivity at +100 bps without deposit beta eating the uplift, harder now than in 2022, but still findable.

And a quick sanity check on mixed models. Some firms have beautiful indexation but awful working-capital cyclicality, cash conversion drops when they need it most. I like to see cash conversion (FCF/NI) north of 90% through a normal year, not just in Q4 clean-up. If I sound picky, it’s because, well, higher real rates punish sloppy capital allocation fast.

One more practical screen I use: average debt maturity ≥ 6 years, ≥ 70% fixed-rate, and at least 25% of revenue under price escalators (CPI, RPI, or contracted 2-3% steps). Pair that with ROIC comfortably above WACC, say ROIC 12% against a true WACC of 8-9% in 2025’s rate regime, and you’ve got cushion. It’s not fancy, it just works when 3% is the new 2%.

Winners, net-net: price makers over price takers, cash today over narratives tomorrow, and balance sheets that don’t flinch when the refi email hits the inbox.

Personal note: I still hold a couple of long-dated growers, habit dies hard, but I size them like they owe me an apology. And I expect the math to be mean every time the 10-year real twitches.

Sectors with the wind at their back (and where to be picky)

Higher-for-longer doesn’t lift every boat, some it actively swamps. So I’m keeping it tight and going where the cash flows actually improve with this rate regime, or where demand is compounding regardless of what the Fed says on a given Wednesday.

Financials: Insurers first. Reinvestment yields are their friend again. The ICE BofA US Corporate Index yield sat roughly in the 5.5-6.0% range for much of 2024 (ICE data), a big step-up from sub-3% new-money years. That gap lets life and P&C carriers steadily ratchet portfolio income higher as bonds roll off. Pick names with conservative liability duration and low-cat volatility (yes, reinsurance pricing helps, but I still haircut CAT). Regional banks, I want fortress core deposits and low wholesale funding dependence. Think >60% noninterest-bearing plus low-cost interest-bearing mix, not hot money. Be wary where loan books lean hard into rate-sensitive CRE. The refi math on 2026-2028 maturities at 200-300 bps higher coupons is… not forgiving.

Energy & materials: I’ll keep beating the drum on disciplined E&Ps and integrated majors with buyback dry powder. The programs are real: Exxon guided $20-25B per year of repurchases across 2024-2025, and Chevron has authorized up to $20B, fuel for per-share math even if strip prices chop sideways. On materials, copper and lithium are the choke points for grid and EV buildouts. The IEA’s 2024 review notes lithium prices fell ~80% from late-2022 peaks, translation: high-cost, high-use miners get squeezed; low-cost balance-sheet adults get to live another cycle. Copper is the grid metal, EVs use several times the copper of ICE cars, and transmission expansion is not optional if electrification is real.

Industrials & infrastructure: Grid modernization and onshoring are multi-year, not quarter-to-quarter. The U.S. DOE’s 2023 Transmission Needs Study pointed to a ~57% increase in transmission capacity required by 2035. Add the AI/data center wave: the IEA’s Electricity 2024 said global data center electricity use could more than double from 2022 to exceed 1,000 TWh by 2026. Who benefits? Transmission EPCs, high-voltage equipment makers, switchgear, transformers, and the unsexy-but-essential grid service providers. Also, domestic capex beneficiaries, facilities, automation, and specialty electrical contractors, keep catching incremental bookings.

Utilities: Pick the regulated names with inflation riders and visible rate-base growth tied to electrification and data center interconnects. Keep a sharp eye on use and allowed ROEs. The U.S. average authorized ROE for electric utilities hovered near ~9.8% in 2024 (Regulatory Research Associates), which is workable if rate base grows mid-single-digits and financing is laddered. I’m not paying up for unregulated merchant exposure with volatile spark spreads.

REITs: Favor CPI-linked or contractual escalators, logistics, ground leases, and select storage where cash rent uplifts are still sticky. I get cautious fast on long-duration, highly levered office (obvious) and on data centers with expensive, fixed power contracts that can crimp spreads just when demand is booming. Balance-sheet terming matters, yes, again, because 2026-2027 refi walls are very real for some platforms.

Healthcare: Managed care with pricing discipline and strong medical cost management still screens well. PwC pegged 2025 medical cost trend around ~7%, similar to 2024, so contracting and benefit design matter more than ever. Tools and diagnostics with recurring consumables and lab workflows keep their budgets in most cycles. Pre-revenue biotech? That’s still long-duration equity; size it like it might need another raise at the worst moment.

Staples & consumer brands: Pick brands that kept real pricing, trade terms, mix, and premium SKUs, rather than one-time shrinkflation tricks. BLS showed food-at-home inflation running near ~2% in 2024, so the easy price hikes are gone; look for gross margin resilience and unit elasticity that didn’t snap back. Pricing power is not a slogan, either retention shows up in the P&L, or it was a pandemic artifact.

Quick personal tell: when I catch myself getting too excited about a story, I re-check cash conversion and the debt ladder. And, yea, sometimes I still get excited, data center power build is one of those where I sound like a broken record, a happy broken record, because the load growth is actually coming through. But discipline first. Discipline, then enthusiasm.

Theme inside the theme: pick sub-industries with real catalysts, reinvestment yield for insurers, buybacks for majors, regulated rate base for utilities, transmission backlogs for industrials. Be picky. Then be a little pickier.

Style tilts that have worked in this regime

Here’s where I net out after staring at factor tapes and attribution sheets way too long (and yes, I still keep a handwritten notebook, old habits). The market has been rewarding real earnings power and balance sheet discipline when rates stay sticky. That’s not a slogan; it’s what the factor returns showed across 2022-2024 and it’s still broadly true in 2025 with curves higher-for-longer than folks expected back in January.

• Quality and profitability have carried water in the higher-rate stretches. The basic link makes sense: when capital isn’t free, ROIC and margin durability matter. In practice, that meant companies with clean accruals, stable earnings, and high gross/operating margins lost less in drawdowns and kept compounding when the tape improved. It’s messy to quantify across every index, but the Fama-French US profitability factor (RMW) was positive across much of 2022-2024, and the pattern held up again earlier this year when real yields re-tested cycle highs. If you want a cleaner proxy: many “quality” index cohorts showed smaller drawdowns than broad beta during the 2022 reset and steadier catch-up into 2023-2024. That consistency, not heroics, has been the edge.
• Value vs Growth: when rates reset in 2022, Value beat Growth by a mile. The Russell 1000 Value fell -7.5% in 2022 while Russell 1000 Growth dropped -29.1% (yes, that wide). In 2023 the gap flipped as mega-cap AI ripped: Growth +42.7% vs Value +11.5%. Last year and this year the spread stayed narrower because the handful of AI winners kept soaking up oxygen. So the takeaway isn’t “buy Value, sell Growth”, it’s “be selective.” Own cash-generating Value that can reprice, and own Growth where unit economics and operating use are real, not just a multiple story.
• Dividend growers over high-yielders. Across cycles, especially when financing costs rise, companies that raise dividends steadily have outperformed the highest-yield cohorts that often carry use and sector concentration risk (the bond-proxy problem). You saw a version of this after the 2022 reset and again in 2023-2024 when higher long rates punished the yield-chasers. The math is simple: sustainable payout growth signals free cash flow growth; ultra-high yields often signal balance sheet stress or no reinvestment runway.
• Small/mid caps could rebound as the refinancing wall gets managed and margins stabilize. The filter that matters: balance sheets. I’m looking for SMIDs with laddered maturities, fixed-rate coverage, and pricing power at the niche level (regional share, product moat). The moment the market believes 2026-2027 refis won’t be a cliff, the multiple penalty can ease quickly. I’ve seen this movie, twice, post the GFC and again in 2016 when credit spreads tightened faster than the headlines predicted.

One personal tell from this year: every time I wanted to “buy the dip” in a levered high-yield basket, a quick debt schedule check (floating vs fixed, next two years’ maturities) kept me honest. That simple screen saved me from a few value traps. Not glamorous, just dependable.

Practical screen: prioritize profitability (high ROIC, stable gross margin), conservative use (net debt/EBITDA that won’t trip covenants), and dividend growth over headline yield. For Value vs Growth, pair cash-cow cyclicals with capital-light compounders; avoid making it theology.

If this sounds a bit overly tidy, that’s on me; the real world is messy. Quality can be pricey, Value baskets can hide secular losers, and SMIDs need credit markets to stay open. But the through-line from 2022 through now has been consistent: cash flow quality + balance sheet strength beat narrative beta when rates matter again.

How to build the equity sleeve now: practical playbook for Q4 2025

Think in real (after-inflation) terms. With headline CPI running around ~3% YoY for much of 2025 (BLS), your equity sleeve has to clear that hurdle after fees and taxes while respecting that cash isn’t zero anymore. Three‑month T‑bills are still hovering near ~5% as we sit in October, which is a very real bogey for any “low quality” equity pitch. My bias, earned the hard way, is to make the portfolio breathe with a 3% baseline and let cash yields and taxes guide sizing, not headlines.

Barbell the equity book: on one end, quality compounders with pricing power; on the other, cash‑generative cyclicals with capital discipline. No theology, just cash math.

• Quality compounders: businesses with high and durable ROIC and mid‑single‑digit or better pricing power. Look for 5-10% organic revenue growth, stable gross margins, and a 5‑year track record of dividend growth or net share count coming down. The S&P 500 payout ratio has hovered ~35% in recent years (S&P Dow Jones Indices), which leaves room for increases, own the names that actually use it.
• Disciplined cyclicals: energy, select industrials, travel/logistics where capex is funded by cash, not wishful thinking. With ICE BofA BBB corporate yields sitting in the mid‑5%s this year, debt‑funded “optimization” is expensive; insist on FCF yields that clear cash by 200-300 bps and boards that return dollars only after maintenance capex. If buybacks are fighting dilution from SBC, it doesn’t count, harsh but true.

Pair with real asset hedges where the mandate allows. A modest commodities sleeve (broad basket or energy/metal producers) can be a cleaner inflation hedge than over‑owning long‑duration growth. When rates are sticky near 3% real inflation, duration bites. Personally, I’d rather own an upstream producer with net cash and variable dividends than stretch for a 35x multiple on a 2030 story… seen that movie.

Cash, taxes, and cadence matter as much as ticker selection.

• Dividend growth & buybacks: prioritize 3-5% dividend growth trajectories with payout ratios below 50% and net use that won’t trip covenants at a 200-300 bps spread shock. Consistent buybacks are fine, but not if they’re funded with 6% paper when the stock is at 25x. Q4 boards love “capital return” press releases; read the cash flow statement, not the headline.
• Tax aware: short‑term gains are still taxed at ordinary rates up to 37%, while qualified dividends cap at 15-20% (plus 3.8% NIIT where applicable). Use Q4 tax‑loss harvesting to offset gains, be mindful of wash‑sale rules (30 days, it sneaks up on you). Asset location: place higher‑yield dividend payers in tax‑advantaged accounts; keep low‑yield/compounding names and real asset exposures where capital gains treatment is better. Not perfect, but it adds up.
• Stagger entries around macro catalysts: CPI release weeks and FOMC meetings still jolt rate‑sensitives. Scale into insurers, REITs, housing adjacencies, and utilities in 3-4 tranches around those dates. It’s not clever, it’s just using realized vol to improve basis. Earlier this year, CPI weeks saw option‑implied vols jump 2-4 pts in many rate‑sensitive groups; same playbook applies now.

Q4 checklist: 1) Barbell: 55-65% quality compounders, 25-35% disciplined cyclicals, 5-15% real assets where allowed. 2) Demand after‑tax, after‑inflation returns that beat ~5% cash. 3) Favor dividend growth and steady net share reduction; avoid buybacks funded with mid‑5%+ debt. 4) Harvest losses without wash‑sales; locate yield in tax‑deferred. 5) Ladder entries around CPI/Fed to let volatility pay you.

A quick personal tell from this year: any time I’ve been tempted to add a high‑beta “cheap” name, I’ve asked one question, does its 2‑year cash flow visibility beat cash after tax? If the honest answer is “maybe,” I pass. Too many maybes in a 3%‑inflation, ~5%‑cash world. And yeah, I know, sometimes those rip 20% on a headline… and then give it back by options expiry.

Final nudge: stay humble on sizing. Let winners compound, trail stops where it’s warranted, and keep a real cash buffer. With inflation around ~3% and cash near ~5% this quarter, the opportunity cost of waiting for your price is not punitive. That alone changes the whole playbook versus 2020-2021.

Your next move: a 30‑minute audit before you hit “buy”

Here’s the challenge I’m putting on your screen, same one I use before I click anything. Assume inflation sits near ~3% and cash pays about ~5% (which is where we’ve been this quarter). Now prove your portfolio can beat that after tax. Not in PowerPoint, in numbers. If something only works when money is free, it probably won’t work. Yes, I know that sounds blunt. It’s also the market we actually have in Q4 2025.

Start with a fast filter. And I mean fast, timer on your phone, 30 minutes, no excuses:

• Quality screen: What % of your holdings are net cash, generate positive free cash flow, and have 5‑year dividend growth? Keep those. If you want a hurdle, fine: a 5‑year dividend CAGR ≥ 5% is a decent starting point. If a company hasn’t raised for 5 years while CPI averaged ~3% this year and ~4% last year at points, you’re probably losing purchasing power.
• Refi risk 2026-2027: Flag anything that needs “cheap” refinancing in 2026-2027. Pull the debt maturity ladder, look at the next 24-36 months. If interest coverage (EBIT/interest) falls below ~3x at current market rates, that’s a yellow, maybe red, flag. Coupons getting reset 200-400 bps higher than the 2020-2021 vintage isn’t theoretical; that’s the tape we’re trading.
• Pricing power score: Check real revenue growth over the last 12-24 months. Not just units. Revenue growth minus CPI. If headline sales grew 4% but CPI ran ~3%, you didn’t move the needle. I know that’s nitpicky. It also separates survivors from storytellers.
• Rebalance out of “story stocks”: If the value sits 10+ years out on your DCF, trim it. I’m not saying torch the dream, just right‑size it. Redirect to quality compounders and dividend growers that can reasonably beat ~5% cash on a 2‑3 year view. I’ve had to admit a few of my pet names were basically long‑dated options. Painful, but necessary.
• Two watchlists: (1) Buy‑the‑dip names for CPI or earnings volatility, companies with net cash, positive FCF, and genuine pricing power. (2) Trim‑the‑rip names when multiples revisit 2021 peaks, if a stock’s forward P/E snaps back to its 2021 band while growth is slower and rates are higher, don’t overthink it.

Quick aside because I tripped on this myself last week: I initially passed on a boring industrial because unit volumes were flat. Then I backed up, realized price/mix was up ~5% with stable margins, which at ~3% inflation is positive real growth. I corrected myself and bought a starter. Point is, don’t let a single KPI blind you; reconcile the whole P&L with today’s rate sheet.

Test your portfolio against a 3% inflation, higher‑for‑longer rate sheet and make adjustments, not excuses.

If you want a mini checklist you can literally copy:

1. % of holdings with net cash, positive FCF, and 5‑year dividend growth ≥ 5%? Target >50% of the portfolio. More is better.
2. Any 2026-2027 maturities >20% of total debt? If yes, stress coupons +300 bps and recheck interest coverage & free cash flow.
3. Real revenue growth over the last 12-24 months ≥ 2%? If negative, require evidence (contracts, backlog, price hikes) before adding.
4. Story stocks with cash flows 10+ years out capped at, say, 10% total. That’s me being generous after last year’s lessons.
5. Populate buy‑the‑dip with levels around CPI/Fed dates; populate trim‑the‑rip with valuation tripwires (2021‑style multiples).

One last clarification because I was a bit sharp up top: I’m not anti‑growth. I’m anti unfunded promises in a 5% cash world. If your names can clear ~3% inflation and ~5% cash after tax over a reasonable window, they stay. If they can’t, they move to the watchlist or the sell ticket. Simple to say, annoying to carry out, but that’s the job.

Frequently Asked Questions

Q: Should I worry about duration risk in my stock picks now?

A: Yes, more than you did in 2019. With cash paying ~4.5-5% this year, long-dated cash flows get discounted harder. I’d favor businesses that convert revenue to free cash flow today, not in year 10. Quick screen: positive FCF margin, net use under ~2.5x, and interest coverage >5x at today’s rates. If the thesis needs “multiple expansion,” I pass. Learned that one the messy way in 2022.

Q: How do I adjust my portfolio for a world where T‑bills yield ~4.5-5%?

A: Treat cash-like returns as your hurdle, not a parking lot accident. Practical moves: (1) Raise quality, durable margins, recurring revenue, low use. (2) Shorten duration, avoid stocks whose value sits beyond year 7 cash flows. (3) Demand a margin of safety, buy at 8-10% implied IRRs, not 5-6%. (4) Use T‑bill ladders for dry powder. (5) In bonds, prefer 2-5 year investment-grade and selectively add BBB credit when spreads compensate. And yeah, stop underwriting with 2% inflation, use 3% base case.

Q: What’s the difference between growth that works in a 5% cash world and growth that just looks shiny?

A: The winners self-fund and price with power. Working growth traits: rising free cash flow per share, gross margins steady or up despite higher rates, and customer payback periods under 24 months. They can raise prices 2-3% above cost creep and still keep churn low. Fragile growth needs capital markets, constant equity raises, big stock‑based comp, and debt that resets +300 bps versus 2021. One more tell: watch cash conversion. If EBITDA turns into <60% FCF because capex and interest chew it up, that “growth” is renting its multiple.

Q: Is it better to sit in T‑bills or stay in equities right now?

A: It depends on your time horizon and required return, but here’s how I frame it in Q4 2025. T‑bills around ~4.5-5% (most months this year) are a real alternative, not just a pit stop. If your equity picks can’t clear a 7-9% expected IRR with conservative assumptions, T‑bills win, especially for funds you’ll need within 3 years. I keep a sticky note on my screen: “Cash has a cost of capital too.” Because opportunity cost cuts both ways.

Practical approach:

• 0-3 year money: ladder T‑bills and 2-3 year IG bonds; keep reinvestment optionality if rates move.
• 3-7 years: barbell, quality equities with near-term FCF plus short/intermediate IG credit. Avoid stretching for yield in long duration.
• 7+ years: own equities, but demand quality and price. At high‑teens to ~20x forward earnings (seen a lot since last year), I underwrite using a 3% inflation base case and a 9% equity discount rate for long‑duration names.

Signals to tilt more into stocks: earnings revisions turning up, IG spreads narrowing without multiple expansion, and companies refinancing 2026-2028 maturities without blowing up interest coverage. Signals to favor T‑bills: multiple expansion with flat EPS, rising delinquency data, and sloppy covenant trends. One small, slightly boring rule that’s saved me: if I wouldn’t buy the stock today at its current implied IRR, I don’t hold it just to “stay invested.” Boring beats sorry.

@article{best-stocks-if-3-is-the-new-2-invest-for-higher-rates,
    title   = {Best Stocks If 3% Is the New 2%: Invest for Higher Rates},
    author  = {Beeri Sparks},
    year    = {2025},
    journal = {Bankpointe},
    url     = {https://bankpointe.com/articles/best-stocks-3-is-new-2/}
}