The Fed just delivered its first rate hike since July 2023, and Wall Street can’t agree on what comes next. Is this the start of a fresh hiking cycle, or just one, maybe two, moves before the Fed pivots back toward cuts? Market participants are watching closely, and right now, nobody has a clean answer. A hiking cycle typically needs at least three consecutive hikes before a pause counts as confirmation.
Historically, when the Federal Reserve starts a cycle of rate hikes, US stocks have suffered in the short run. However, long-term investors need not panic. According to Goldman Sachs Research, stocks typically produce gains a year after interest rates begin to rise.
According to a report by chief US equity strategist Ben Snider of Goldman Sachs Research, the S&P 500 has experienced an average three-month decline of 2% at the beginning of seven hiking cycles in recent decades.
Looking ahead, though, the index has produced an average 12-month gain of 9%, with positive returns except in 2022.
What do higher rates mean for stock valuations?
Equity multiples have declined this year, but valuations relative to bonds have been roughly unchanged. The S&P 500’s forward price-to-earnings ratio has dropped from 22x at the start of 2026 to 19x.
While uncertainty around AI returns and questions about the staying power of recent earnings growth have contributed to that decline, rising interest rates have also been part of the story, according to Goldman Sachs Research.
Stocks are also more sensitive to long-term rates than to short-term rates. Roughly 75% of the present value of the S&P 500 reflects cash flows 10 years or more in the future, according to Goldman Sachs Research. This is why S&P 500 returns have the strongest correlation with changes in long-term bond yields, mirroring the long-term nature of equity cash flows.
Both the 10-year and the 30-year US Treasury yields have surpassed the multidecade high level of 5%.
Sector performance splits down predictable lines
When the Fed begins raising interest rates, sector performance does not follow a consistent pattern. According to Goldman Sachs Research, energy and technology companies have delivered the highest average returns in the three months following an initial hike, while healthcare has produced the lowest average returns.
No sector has consistently outperformed or underperformed during previous episodes of rate hikes. Of the many sectors, it is financial companies that tend to benefit when interest rates rise. On the other hand, like the broader information technology sector, AI stocks have shown a modest negative correlation with real yields.
But it’s high-growth, low-current-profit companies that get hit hardest. Their valuations are especially vulnerable to rising yields, because they’re priced mostly on cash flows expected years, even decades, out, not on what they’re earning today.
When you discount those distant cash flows back to a present value, a higher yield shrinks that present value by a lot more than it would for a company already generating steady profits now.
A company can maintain its valuation as interest rates rise if investors see it as less risky, a lower equity risk premium, or expect it to grow faster, according to Goldman Sachs Research.
To fully offset the impact of a 1 percentage point increase in the cost of equity from today’s levels, a company’s expected long-term growth would need to increase by 2 percentage points.
One way to boost growth is through investment in capital expenditures and research and development. Mergers and acquisitions, as well as spinoffs, are also among the ways companies can improve their outlook for growth.
Bottomline
S&P 500 has gained nearly 15% in the last 12 months to settle at 7,637.76. Last week’s rate hike kept the momentum down as expected, and the index ended 0.08% lower. How the S&P 500, the most-watched barometer of the overall US stock market and broader economic health, moves in the weeks and months ahead, only time will tell.
Disclaimer: This article provides factual analysis only and is not, and should not be construed as, an offer, solicitation, or recommendation to buy or sell securities. Investment in foreign securities involves significant risks, including currency fluctuations, different financial reporting standards, and varying regulatory environments. The historical performance of US stocks is not a guarantee of future returns, and gains should not be viewed as an offer or solicitation to buy. Investors must conduct their own independent due diligence and seek advice from a registered financial advisor. Financial Express is not responsible for any decisions made based on this information.