The Fed Just Raised Rates. Cost of Capital Is a Stock Selection Question Again

On September 16, the Federal Open Market Committee raised the target federal funds rate by 25 basis points to 3.75%–4.00%. The vote was unanimous, and it was the first increase since 2023.¹ For a market that spent three years positioning for the next cut, the useful question now is which businesses actually need the credit market and which ones fund themselves.

Why the Fed Moved

The immediate driver was inflation that hasn’t finished the job. August CPI came in at 3.4% year over year, with core at 2.4%.² Elevated energy prices tied to the Iran conflict have kept the headline number well above the Fed’s 2% target.

The labor market argued the other way. July payrolls showed a surprise loss of 23,000 jobs alongside steep downward revisions to May and June.³ That is usually the kind of data that makes a central bank hesitant to tighten. The Committee moved anyway, and the median official’s dot plot points to one more hike before year-end.¹

Inflation is firm enough to force tightening, and the labor market is soft enough to make it uncomfortable. For companies that have been borrowing to grow, that is a difficult backdrop.

The Refinancing Math Doesn’t Care About the Narrative

More than $1 trillion of U.S. corporate debt matures annually from 2026 through 2028: roughly $1.17 trillion this year, $1.20 trillion in 2027, and $1.46 trillion in 2028.⁴ Much of it was issued in a materially cheaper rate environment. Refinancing it means replacing cheap capital with expensive capital, and that repricing hits interest expense immediately, whether or not the underlying business has changed at all.

Issuers are already working through it. Federal Reserve corporate-security data show $1.84 trillion of bond issuance in the first half of 2026.⁵ The question is what they’re paying for it now.

In aggregate, S&P 500 borrowing costs have risen only modestly. Goldman Sachs Research notes that 72% of S&P 500 debt is fixed-rate extending beyond 2028, and that interest expense remains small relative to profits. Their model treats a 100 basis point rise in bond yields as roughly EPS-neutral at the index level.⁶ The large-cap picture looks manageable.

But an index average is not a portfolio. It smooths over the dispersion underneath: the gap between a company generating more cash than it consumes and a company whose growth plan assumes it can roll its debt at something close to the old coupon. Goldman makes the point directly. Smaller companies carry weaker balance sheets and a higher share of floating-rate debt, so the aggregate comfort thins out quickly as you move down in size and quality.⁶

What Free Cash Flow Screens For

This is the argument for selecting on free cash flow rather than earnings or revenue growth. A business with durable free cash flow relative to invested capital has an internal source of funding. It can invest, pay a dividend, or repurchase shares without asking the credit market for permission. When the cost of external capital rises, that flexibility starts to look like a competitive advantage.

Free cash flow is also harder for management to shape than earnings. It is less exposed to revenue recognition timing, discretionary cost treatment, and asset and liability judgment calls, which is why it tends to reveal capital intensity earlier than an earnings-based screen does.

The Abacus FCF Leaders ETF (ABFL) applies that framework to U.S. large- and mid-cap equities: an actively managed portfolio built on FCF-ROIC, prioritizing prudent capital expenditure, low accruals, high cash flow margins, and strong asset turnover, with allocation adapted across the business cycle. The methodology is backed by roughly 30 years of empirical validation. ABFL has an expense ratio of 0.49% and is benchmarked to the Russell 3000 Total Return Index.⁷

What to Watch

• Whether the dot plot’s second hike arrives, or labor weakness stalls it. The Committee is split close to evenly on further tightening.¹
• Whether investment-grade spreads widen as 2027 maturities come into refinancing range.
• Whether index-level interest coverage starts to deteriorate, and how wide the dispersion underneath it gets.
• Whether energy prices ease enough to take pressure off core inflation.

A hiking cycle doesn’t reward or punish equities uniformly. It sorts them by who has to borrow, which makes it a cash flow question.

Investing involves risk. Principal loss is possible. Past performance does not guarantee future results. This material is for informational purposes only and should not be considered investment advice or a recommendation of any particular security or strategy. Diversification does not assure a profit or protect against loss.

Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses. This and other information is in the statutory and summary prospectuses, a copy of which may be obtained by visiting the Fund’s website at www.abacusfcf.com/ABFL. Please read the prospectus carefully before you invest. Investing involves risk. Principal loss is possible.

The Russell 3000® Index measures the performance of the 3,000 largest publicly traded U.S. companies, based on market capitalization. The Index measures the performance of approximately 98% of the total market capitalization of the publicly traded U.S. equity market. It is not possible to invest directly in an index.
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Sources

1. Federal Open Market Committee, policy statement and Summary of Economic Projections, September 16, 2026.
2. U.S. Bureau of Labor Statistics, Consumer Price Index, August 2026, released September 11, 2026.
3. U.S. Bureau of Labor Statistics, Employment Situation, July 2026, released August 7, 2026.
4. S&P Global Ratings, U.S. rated corporate debt maturity schedule, 2026 through 2028.
5. Board of Governors of the Federal Reserve System, corporate-security issuance data, first half 2026.
6. Goldman Sachs Research, “Can the S&P 500 Rally as Treasury Yields Rise?”
7. Abacus FCF Advisors fund materials, abacusfcf.com/ABFL.

Definitions

• Federal funds rate: the interest rate at which banks lend reserves to each other overnight. The Federal Reserve sets a target range for it as its primary monetary policy tool.
• Basis point: one one-hundredth of a percentage point.
• FOMC: the Federal Open Market Committee, the Federal Reserve body that sets U.S. monetary policy.
• Dot plot: the Federal Reserve’s published chart of individual policymakers’ projections for future interest rates.
• CPI: the Consumer Price Index, which measures the average change in prices paid by urban consumers for a basket of goods and services.
• Core CPI: the Consumer Price Index excluding food and energy prices.
• EPS: earnings per share, a company’s net income divided by its number of outstanding shares, and a common per-share measure of profitability. An EPS-neutral change is one that, on balance, leaves that figure unchanged.
• Free cash flow (FCF): the cash a company generates from operations after subtracting capital expenditures, representing cash actually available to the business rather than accounting earnings.
• FCF-ROIC: free cash flow measured relative to return on invested capital, an assessment of how efficiently a company converts invested capital into free cash flow.
• Accruals: accounting entries recording revenue or expenses before cash changes hands. High accruals can indicate earnings quality issues.
• Asset turnover: revenue generated per dollar of assets.
• Maturity wall: a large volume of outstanding debt coming due within a concentrated period.
• Interest coverage: a measure of a company’s ability to pay interest on its debt from operating earnings.
• Credit spread: the yield difference between a corporate bond and a comparable-maturity Treasury, reflecting perceived credit risk.