What happened

Large-cap stocks are getting knocked around in early trading Thursday, with shares of companies as varied as internet search titan Alphabet (GOOGL -1.60%), shipping giant United Parcel Service (UPS -3.25%), and video streamer Netflix (NFLX -0.75%) all dipping into the red. As of 10 a.m. ET, Alphabet is trading 1.9% below yesterday's close, UPS is off 2.2%, and Netflix is down by 4.6%.

And the Federal Reserve is probably to blame.

So what

As recently as last week, stocks were rallying on the good news that inflation rates were "only" 7.7% in October. Granted, 7.7% is still a pretty high number, but stock market analysts had expected the figure to be even higher, and they interpreted the more moderate inflation as a sign that the Federal Reserve might slow its pace of interest rate hikes, or begin raising interest rates in smaller increments, or -- dare we hope? -- both.

But according to one of the men responsible for setting those Fed interest rates...no. We dare not hope.

Quoting St. Louis Fed President James Bullard this morning, CNBC reported that "the change in the monetary policy stance appears to have had only limited effects on observed inflation" and, therefore, "the policy rate will need to be increased further." Translation: Interest rates are going to keep going up, and potentially much higher than the stock market has bargained for.  

Instead of topping out soon at a targeted interest rate of 5%, the Fed might well need to raise rates as high as 7% to stop inflation for good.

Now what

OK. But why is that bad news for powerful, large-cap stocks like Netflix, Alphabet, and UPS?

Well, there are actually two reasons. First, higher interest rates tend to slow the economy (in fact, that's kind of the point -- because an overheated economy is what the Fed blames for creating inflation in the first place!). And if the Fed is now signaling that it may raise interest rates as much as 40% higher than what most were expecting, then Wall Street's growth projections for Netflix, Alphabet, and UPS may need to come down a bit, thus lowering the present-day value of their stocks.

The second reason is more business-related than stock-related. One of the most notable trends of the most recent earnings season was U.S. companies reporting good revenue growth in constant currency, but lousy growth after those sales were converted into U.S. dollars (from the foreign currencies in which the bills were originally paid). You see, as U.S. interest rates rise, the value of the U.S. dollar tends to rise as well, and the value of foreign currencies -- and foreign-earned sales and income -- falls.

If U.S. interest rates continue to climb from their current level of 4% to reach 5% and potentially as high as 7%, then this will tend to depress the value of literally tens of billions of dollars of foreign-sourced revenue at Netflix, Alphabet, and UPS. Indeed, according to data from S&P Global Market Intelligence, Netflix and Alphabet get most of their revenues from beyond U.S. borders, making them especially vulnerable to this trend.

Of course, the good news is that none of this is set in stone. So far, Bullard appears to be the only Fed governor talking about 7% targeted interest rates -- but that could change. Today's falling stock prices are reflecting investor acknowledgement that there's now a new risk on the horizon.