Introduction
After the most aggressive rate hiking cycle in decades (2022-2023, from near-zero to 5.25-5.50%), the Federal Reserve began cutting rates in September 2024, initiating a pivot that is reshaping the valuation landscape across every methodology and sector. As of March 18, 2026, the federal funds target range stands at 3.50-3.75% following three 25 basis point cuts in September, November, and December 2025. Policymakers project one additional cut in 2026, though elevated inflation (PCE at 2.7%, above the 2% target) and geopolitical uncertainty (the Iran conflict's impact on oil prices) have tempered expectations for aggressive further easing.
Understanding where rates are now, how the pivot has already affected valuations, and what the trajectory means for M&A activity is essential context for investment banking professionals working in the current environment.
Where Rates Stand Now
The rate trajectory from 2022 to 2026 tells the story of the current valuation cycle:
| Period | Fed Funds Rate | Impact on Valuations |
|---|---|---|
| Pre-2022 | 0-0.25% | Record-high multiples, aggressive LBO pricing, 30-50x SaaS revenue multiples |
| Mid-2023 (peak) | 5.25-5.50% | Multiple compression of 40-60%, M&A volume down 35-40% |
| Late 2025 (post-cuts) | 3.50-3.75% | Recovery in multiples and deal activity |
| End 2026 (projected) | ~3.25-3.50% | One additional cut expected; "higher for longer" narrative |
The "higher for longer" environment means the current rate level (~3.5-3.75%) is the new baseline for valuation work, not a temporary stop on the way to zero. WACC calculations, LBO models, and DCF assumptions should all reflect this reality.
How the Pivot Has Affected Valuations
DCF Values Have Expanded
Lower risk-free rates reduce the cost of equity (through CAPM) and the cost of debt, lowering WACC and increasing the present value of future cash flows. The 175 basis point decline in rates since the peak (from 5.50% to 3.75%) has translated to approximately a 75-100 basis point decline in WACC for most companies, boosting DCF-implied enterprise values by roughly 10-15%. The effect is amplified for companies with long-duration cash flows (growth companies, infrastructure, technology) because a larger share of their value comes from the terminal value, which is the most discount-rate-sensitive component.
LBO Affordability Has Improved
Lower rates reduce the cost of leveraged debt, allowing sponsors to borrow at lower all-in costs, support higher leverage multiples, and pay higher entry prices while still achieving target IRRs. Average institutional loan margins fell to 3.13% (SOFR + ~313 bps) in Q3 2025, the lowest on record, driven by intense competition among lenders. The LBO floor on the football field has risen approximately 1-1.5 turns of EBITDA since the 2023 trough.
Trading Multiples Have Partially Recovered
As rates decline, investors discount future earnings less heavily, increasing what they pay per dollar of earnings. M&A EBITDA multiples averaged 11.8x in the first half of 2025, up from a trough of 9.4x in early 2023. The recovery has been strongest for growth companies (whose value is most dependent on future cash flows) and defensive assets (utilities, infrastructure, data centers) that benefit from both lower rates and secular demand trends.
- Rate Pivot
The shift from a rising interest rate environment (tightening monetary policy) to a falling or stable rate environment (easing or neutral). In the current cycle, the pivot began in September 2024 when the Fed made its first rate cut after holding at 5.25-5.50% for over a year. The pivot affects every valuation methodology simultaneously: DCF outputs rise (lower WACC), trading multiples expand (investors pay more for earnings), and LBO affordability improves (cheaper leverage). The pivot's impact on valuations is most powerful in the early stages, when the market reprices from "rates are rising" to "rates are falling," because the change in expectations (not just the change in rates) drives asset prices.
Impact on M&A Activity
The rate pivot has driven a broad recovery in deal activity. Global M&A surged to $4.81 trillion in 2025, approximately 40% above 2024 levels and the second-highest total on record. A record 70 mega-deals (above $10 billion) contributed $1.53 trillion, including Netflix's $82.7 billion bid for Warner Bros. Discovery and the $57 billion Electronic Arts LBO.
- Higher for Longer
The market consensus that the Federal Reserve's neutral interest rate (the rate that neither stimulates nor restrains the economy) has increased from the pre-COVID level of approximately 2.5% to 3.0-3.5%, meaning rates will remain meaningfully higher than the 2010-2019 average even after the current easing cycle is complete. This has profound implications for valuation: the "floor" for WACC is higher than the previous decade, which means the ceiling for multiples is lower. A company that traded at 20x EBITDA when the risk-free rate was 1.5% may trade at 13-15x when the risk-free rate settles at 3.5%, even if its fundamentals are identical. Valuation analysts should treat "higher for longer" as a structural shift in the discount rate, not a temporary condition.
Bid-ask spreads have narrowed. The valuation gap that paralyzed negotiations in 2022-2023 has largely closed as both buyers and sellers converge on the new rate reality. Sellers have adjusted expectations downward from 2021 peaks, while buyers have gained confidence that financing is available at competitive terms.
PE deployment has accelerated. With over $2 trillion in dry powder and improving leverage terms, sponsors are deploying capital more aggressively. The number of mega buyouts (deals above $10 billion) more than doubled in 2025 versus 2024.
Take-privates have returned. The combination of public market valuations that remain below 2021 peaks (for some sectors) and improved financing conditions has enabled a wave of take-private transactions, particularly in software and healthcare services.
Implications for Valuation Practice
Historical Precedent Transaction Selection
When selecting precedent transactions, the analyst should segment by rate environment. Deals from 2020-2021 (zero rates) are less comparable to 2025-2026 deals (3.5-4% rates) than deals from 2017-2019 (2-3% rates). The current rate environment most closely resembles the pre-COVID period, making 2017-2019 precedent transactions potentially the most relevant benchmarks for current deal pricing.
DCF Sensitivity to Further Rate Changes
The sensitivity table should prominently feature WACC sensitivity, showing how the implied value changes under different rate scenarios: (1) rates decline further to 3.0-3.25% (the Fed's projected terminal rate), (2) rates hold at current levels (the "higher for longer" scenario), or (3) rates reverse and increase (if inflation re-accelerates, forcing the Fed to pause or hike).
Financing Assumptions in LBO Models
LBO models should use current market terms (SOFR + spread at current levels) for the base case, not historical averages. The analyst should note that further rate cuts would improve returns (lower interest expense, faster deleveraging) while a rate reversal would pressure them.
Free Interview PDF Guide