When the temperature rises, markets feel the heat

Heatwaves used to sit mainly on the weather pages. But these days, they belong in the economic and investment discussion too. 

Recent hot spells in the UK have pushed temperatures above 40°C but this is not a localised matter. Temperatures in eastern US and southern Europe have also been around 40°C, Spain and Portugal have seen temperatures up to 43°C, and it has climbed to the mid-40s°C in northern India, including the Delhi region. China has also faced severe heat, with some areas above 40°C and local reports close to 46°C. This is not simply a run of uncomfortable summer days. A warmer climate is making periods of extreme heat more frequent, more intense and more difficult for economies to absorb.

Why investors should pay attention to rising temperatures

For investors, the important point is that high temperatures can change how economies behave. When conditions become too hot, people aren’t as productive at work, travel less, spend differently and use more electricity. That can feed through to economic growth, company earnings, government budgets and household finances.

When heat becomes an economic problem

The first and most direct effect is on productivity. Construction workers need longer breaks. Farm workers may shift their hours or lose output altogether. Delivery drivers, factory staff, rail engineers and warehouse teams all face tougher conditions when the temperature climbs. In the most extreme cases, work has to stop. Globally, heat stress is expected to reduce working hours by the equivalent of around 80 million full-time jobs by 2030, according to the United Nations. That matters for gross domestic product (GDP) because output depends, in part, on how much work can be done. Fewer effective working hours mean fewer goods moved, fewer homes built, fewer crops harvested and lower tax receipts.

The GDP impact can therefore be material. Some estimates suggest extreme heat could reduce European output by around 0.5% a year, with larger effects in southern economies where temperatures are higher and tourism, agriculture and outdoor work are more exposed. Under repeated severe heat scenarios, the cumulative drag could reach 5%-7% of GDP by the end of the decade. India is particularly vulnerable because a large share of employment remains outdoors or in heat-sensitive sectors. There, heat-related productivity losses could result in a potential economic hit at between 2.5%-4.5% of GDP.

How companies are feeling the heat

For companies, the picture is mixed. Some businesses may benefit from higher demand for electricity, air conditioning, grid equipment, energy storage, water infrastructure and more efficient buildings. During recent US heatwaves, electricity demand in the largest US grid topped 162 gigawatts, which was the second highest level in its history. Cooling is also becoming a major long-term investment theme. Energy used for space cooling could more than double by 2050 without further efficiency improvements, which points to growing demand for better grids, cleaner power, efficient buildings and smarter cooling technology.

At the same time, higher demand can bring higher costs. Power prices can rise sharply when heat arrives alongside storms, outages or weak grid capacity. In the recent US heatwave, wholesale electricity prices reportedly rose by more than 240% in New England and doubled in New York City, as air-conditioning demand surged and storms left nearly one million households without power across several states. In the early July eastern US heatwave, real-time wholesale prices in the PJM power market peaked at around $2,000 per megawatt hour, jumping 11-fold, with the US Department of Energy stepping in with its third emergency order of 2026.

That kind of spike can squeeze margins for manufacturers, supermarkets, data centres, food producers and any business that relies heavily on cooling or refrigeration. Weather-related losses are already substantial. Global natural disasters caused around $320bn of economic losses in 2024, with roughly $180bn uninsured, resulting in it being very costly for companies and economies. While not all of that was heat-related, it shows the scale of climate and weather risk now moving through balance sheets, insurance markets and public finances.

Sector-specific risks

Other sectors face more visible disruption. Agriculture can suffer from lower crop yields and livestock stress, which can then feed into food inflation. Airlines can face delays because very hot air affects aircraft performance. Rail networks may slow services when tracks overheat, roads can soften and construction projects can slip. Restaurants, retailers and leisure venues may lose customers when people choose to avoid travelling during the hottest part of the day. Granted, for the UK, it is possible there will be some regional seaside towns which do benefit from increased tourism. 

Governments confront rising climate costs

It is also important to recognise that governments are also drawn in. Heatwaves increase pressure on hospitals, emergency services, cooling centres, water infrastructure, power grids and public transport. Adaptation spending is rising, but the funding gap remains large. International public adaptation finance for developing countries rose from around $22bn in 2021 to $28bn in 2022, yet estimated needs are far higher. Over time, climate adaptation starts to look less like optional environmental spending and more like basic economic maintenance. Hence, climate related investments appear more compelling.

What rising temperatures mean for households

For households, the impact is immediate and personal. Hot weather can mean higher electricity bills, disrupted travel, more expensive food, health risks and, for some workers, lost income. Older people, children and outdoor workers are usually most exposed. Europe’s 2022 summer heat was associated with more than 61,000 heat-related deaths across 35 countries – a stark reminder that the economic cost sits alongside a very real human cost.

The investment case for staying ahead of climate risk

What was once considered a far-off impact is starting to become more near-term oriented. Extreme heat has now become another factor investors need to consider alongside inflation, interest rates and geopolitics. Companies with resilient supply chains, manageable energy costs and credible plans for adapting to a warmer climate are likely to be better placed than those that do not prepare. At the same time, the transition is creating opportunities. Demand is growing for more efficient cooling systems, modern electricity grids, renewable energy, battery storage, water infrastructure and buildings designed to cope with higher temperatures. Businesses providing these solutions could benefit from years of structural investment. As with many long-term trends, there will be winners and losers, but for patient investors the focus should remain on identifying companies that can adapt, innovate and continue to grow in a changing world.