Fed rate hike may pressure US stocks near term, history points to rebound: Goldman Sachs

The US Federal Reserve raised its benchmark interest rate by 25 basis points, its first increase since 2023, as policymakers moved to address persistent inflationary pressures amid evolving economic conditions. Federal Open Market Committee (FOMC) unanimously voted 12-0 to raise the target range for the federal funds rate by a quarter percentage point to 3.75-4 per cent.

Additionally, the move was broadly in line with market expectations, with traders pricing in a more than 90 per cent probability of a 25-basis-point increase ahead of the decision.

GS noted, US stocks have historically struggled when the Federal Reserve begins a cycle of hiking rates. But equities tend to generate gains a year after interest rates start rising.

According to Ben Snider, chief US equity strategist at Goldman Sachs Research, the S&P 500 has declined by an average of 2 per cent in the first three months of seven Federal Reserve rate-hike cycles over recent decades. However, the index has historically recovered over a longer horizon, delivering an average gain of 9 per cent over the following 12 months, with positive returns in every such episode except 2022.

GS also noted that markets may have already factored in much of the expected increase in interest rates, with multiple Fed rate hikes currently priced in through mid-2027. This could reduce the likelihood of a hawkish monetary policy surprise for markets.

Interest-rate markets are already pricing multiple rate increases by the middle of 2027, making it less likely that monetary policy will produce a hawkish surprise for markets.

Meanwhile, the 10-year US Treasury yield has climbed to around 5 per cent, its highest level since 2007. Equity valuations have also declined this year, with the S&P 500s forward price-to-earnings ratio falling from 22 times at the beginning of 2026 to 19 times, although valuations relative to bonds have remained broadly unchanged.

The gap between the S&P 500 earnings yield of 5.2 per cent and the inflation-adjusted 10-year Treasury yield of 2.6 per cent stands at around 270 basis points.

Snider noted, Outside of brief market selloffs, that spreada simple proxy for the equity risk premiumhas been fairly steady over the past two years.

The report also found no consistent sectoral pattern during previous monetary tightening cycles, noting, No sector has reliably outperformed or underperformed across past episodes of rate hikes.

The impact of interest rates on US stocks varies considerably, with valuations of long-duration stocks, which typically have high growth rates but relatively low current profits, particularly vulnerable to rising yields.

According to Snider, interest rates can affect corporate earnings, solvency and equity valuations, although these risks currently appear limited. (ANI)