Rise in Treasury Yields May Signal Higher Returns for S&P 500 a Year Later
US stocks have historically struggled when interest rates begin to rise, but equities tend to generate gains a year after rates start increasing, according to Goldman Sachs Research. The S&P 500 has posted an average three-month decline of 2% at the start of seven hiking cycles over recent decades.
However, looking further out, the index has delivered an average 12-month gain of 9%, with positive returns in every episode except 2022. Goldman Sachs Research suggests that much of the increase in rates from a cycle of Fed hikes may already be reflected in yields, as interest-rate markets are pricing multiple rate increases by the middle of 2027.
The medium-term impact of Fed tightening on equities will depend on how tightening affects earnings growth, which is the most important driver of stocks. Companies can counteract the drag of higher rates on their valuations by accelerating growth through investments in capital expenditures and research and development.