Don’t Fear the Hike

• The bond market is increasingly pricing in a September rate hike.

• Speculators are worried rising rates will hurt the stock market.

• Since 1980, the S&P 500 has climbed an average of 21% in the 24 months after the first hike of a Fed tightening cycle.

Forget valuations. The latest case against stocks is coming from the bond market….

One of the latest arguments against investing in the stock market is rising bond yields. The bears point to the recent change in the 10-year U.S. Treasury Bond. Since the end of February, when the conflict with Iran started, the yield has jumped from around 3.95% to the current 4.65%. That brings it close to the recent peak set at the start of 2025…

The 10‑year is Wall Street’s north star. It’s the risk‑free benchmark for the maturity that actually matters. It sits right in the Goldilocks zone of the curve: long enough to capture lenders’ views on medium‑to‑long‑run growth and inflation, but not so long that it drifts into the thin, quirky trading of the 30‑year. Because Treasuries carry no credit risk, every fixed‑rate loan in the economy gets built as “risk‑free rate plus a spread for credit, prepayment, and liquidity.” And when lenders reach for that risk‑free anchor, they reach for the 10‑year.

It also reflects investors’ future expectations, not just current Fed policy. The federal funds rate is a tool that our central bank uses to set overnight and short-term borrowing costs. But the 10-year yield is an indicator of where Wall Street thinks policy is headed. Based on the latest move, bond market speculators are wagering that interest rates and borrowing costs are headed higher. Hence the calls for a stock market drop as corporate loan servicing becomes more expensive.

But those naysayers may be getting ahead of themselves. You see, rate hikes aren’t negative for the stock market. They’re typically enacted to slow a growing economy —though this time a hike would be less about cooling growth and more about defending the Fed's inflation-fighting credibility. Based on the data I looked at, the stock market tends to rally after the first rate hike. That tells me that a Fed hike, now looking increasingly likely at the September meeting, should underpin a steady rally in the S&P 500 Index.

But don’t take my word for it, let’s look at what the data’s telling us…

Starting with every Fed tightening cycle since 1980, I identified the month of the first rate hike. I then pulled the S&P 500's closing price on the last trading day of that month (or the closest prior close, if the month's final day wasn't a trading day). From there, I tracked the index's 12- and 24-month returns, using the same last-trading-day convention.

That method turned up ten distinct hiking cycles: August 1980, March 1983, January 1987, March 1988, February 1994, March 1997, June 1999, June 2004, December 2015, and March 2022. Here's how the S&P 500 performed following each:

The pattern holds up. In 8 of the last 10 cycles, the S&P 500 was higher a year after the first hike, and the average gain over that stretch was better than 7%. Stretch the window to 24 months and the picture gets even more lopsided: still an 80% win rate, but the average return climbs to 21%, with a median gain of 17%. And that's before counting dividends. This analysis uses price-only closes, so the real total-return picture (dividends reinvested) is even better than what's shown here.

Yes, there were rough patches. The 2022 cycle saw the index down 9.3% a year after liftoff, and 1987's first hike was followed by a 6.2% decline (that one, notably, included October's crash). But even those cycles turned around: the 2022 cohort was up 16% by month 24, and the 1987 cohort rebounded to an 8.5% gain over the same span. The lesson isn't that rate hikes are risk-free for stocks, it's that the initial move higher in rates has historically been a poor standalone reason to get bearish on equities.

So, like I said at the top, a first hike has rarely been the market-topping event the bears are treating it as. If history is any guide, don't bet against the S&P 500 just because the Fed, and the bond market ahead of it, is finally starting to move.

Five Stories Moving the Market:

President Donald Trump pressed Congress to pass digital asset market structure legislation that is a top priority for the industry, as he hosted cryptocurrency executives at the White House; Trump cast the so-called Clarity Act as critical to keeping the US edge in emerging technologies – Bloomberg. (Why you should care – passage of this legislation should remove a key regulatory hurdle for the tokenization of stock investing, boosting the outlook for ethereum, which already hosts the majority of tokenized asset volume)

Canadian trade negotiators were flying back to Ottawa to work on finalizing a trade agreement with the U.S. after President Donald Trump ‌said he had a deal with Canada that would stave off the threat of new U.S. tariffs – Reuters. (Why you should care – the proposals look to lower current tariff levels, rather than raise them, easing the inflation outlook and boosting trade potential)

Minutes of the Federal Reserve’s latest monetary policy meeting showed many participants assessed that policy tightening would likely be necessary if inflation did not decline; some participants commented that financial conditions might not currently be sufficiently restrictive to facilitate a return of inflation to 2 percent – Federal Reserve. (Why you should care – officials noted that financial conditions have started to tighten in anticipation of a rate hike)

The U.S. Treasury Department said it would double the size ​of liquidity support buyback operations for longer-dated nominal coupon securities from $2 billion ‌to at least $4 billion per operation; the change, which will apply to the 10-year to 20-year sector and the 20-year to 30-year sector, will be effective September 9 through November 4 – Reuters. (Why you should care – the increased buyback size should help to drive down longer dated bond yields)

James Bullard, former president of the St. Louis Fed and dean of Purdue's Mitch Daniels School of Business, voiced support for a September interest rate hike; Bullard said take proactive steps now could stave off a “headache” in early 2027 – Bloomberg. (Why you should care – Bullard was one of the most prescient policymakers when it came to interest rates and the economy, during his tenure as the St. Louis Fed president)

Economic Calendar:

Earnings: DE, FLO, HOV, NTES, ROST, WMT

Riksbank (Sweden) Monetary Policy Announcement (3:30 a.m.)

ECB Publishes Account of Monetary Policy Meeting (7:30 a.m.)

U.S. - Initial Jobless Claims (8:30 a.m.)

U.S. - Continuing Claims (8:30 a.m.)

Treasury Auctions $8 Billion in 30-Year TIPS (1 p.m.)

U.S. – Philadelphia Fed Manufacturing Index for August (8:30 a.m.)

Fed's Balance Sheet Update (4:30 p.m.)

Japan – CPI for July (7:30 p.m.)

Japan – Au Jibun Bank Japan Manufacturing, Services, Composite PMI (Preliminary) for August (8:30 p.m.)