US Stocks May Rebound After Initial Interest Rate Hikes

Goldman Sachs Research suggests that despite the current short-term decline in US stocks after the Federal Reserve begins a cycle of hiking rates, equities tend to generate gains a year after interest rates start rising. In fact, since recent decades, US stocks have posted an average three-month decline of 2% at the start of seven hiking cycles over, but delivered an average 12-month gain of 9%, with positive returns in every episode except 2022.

The S&P 500's forward price-to-earnings ratio has fallen from 22x to 19x this year due to rising interest rates and uncertainty around AI returns. However, valuations relative to bonds have remained roughly unchanged. Corporate balance sheets may be somewhat insulated from rising rates in the near term because most large-company debt carries fixed rates and long maturities.

Ben Snider, chief US equity strategist at Goldman Sachs Research, writes that companies can counteract the drag of higher rates on their valuations by accelerating growth through investments such as capital expenditures, research and development, mergers and acquisitions, or spinoffs. The speed of interest rate moves also affects stocks' performance, with significant rate increases typically leading to short-term losses for equities.

According to Goldman Sachs Research, the sensitivity of US stocks to interest rates varies widely, with long-duration stocks being particularly vulnerable to rising yields. In contrast, financial companies tend to benefit when interest rates rise. The valuations of AI stocks have shown a modest negative correlation with real yields.