The transmission mechanism of monetary policy works through higher costs of capital that lowers demand for capex and hiring but also raises return requirements for equity to pay the debtholders in the company.
Higher interest rates are a redistribution of value from the junior parts of the capital structure to the senior parts, see chart below. Someone has to pay the higher level of interest rates in corporate capital structures, and it is not the Fed, it is the equity holder.
In short, companies with no earnings, no cash flow, and no revenue will continue to struggle simply because they cannot pay the higher debt servicing costs. In other words, when interest rates are higher for longer, companies with earnings tend to outperform because companies with earnings are able to pay higher debt servicing costs. The purpose with higher interest rates is to slow growth, which makes value more attractive than growth.
In fact, this is the entire idea from the Fed with raising interest rates—to discourage too much risk taking, such as investments in companies and capital structures with no earnings, no revenue, and no cash flow. Examples of unattractive sectors are growth, software, and venture capital.
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