History's Verdict: Hikes Don't Kill Bull Markets

Editor's Note: I posted this analysis a couple of weeks ago on the S&P 500's tendency to rally once the Fed starts hiking. And with the central bank back in play for another round of tightening, it felt like the right moment to revisit it.

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:

U.S. Treasury Secretary Scott Bessent told Japanese Finance Minister Satsuki Katayama and Bank of Japan Governor Kazuo Ueda that the Asian country’s next step should be to raise interest rates, according to a Japanese Broadcasting Company report; Bessent met with Katayama and Ueda on the sidelines of the Group of 20 finance minister and central bank governor meeting – Bloomberg. (Why you should care – Bessent has repeatedly said he would prefer see the Bank of Japan raise interest rates to stabilize the yen rather than the government intervene in the currency markets)

U.S. Federal Reserve Chairman Kevin Warsh told G20 ‌finance leaders that the world is seeing a global investment surge that is helping to power growth, reversing past savings gluts that kept capital in low-yielding instruments amid a shortage of investment opportunities – Reuters. (Why you should care – Warsh said the idea that growth will slow due to a lack of innovation no longer applies in the current environment)

U.S. President Donald Trump and his senior aides have been considering waging limited strikes in the Strait of Hormuz to prevent Iran from reconstituting its radar and missile capabilities to attack ships, according to U.S. officials – AXIOS. (Why you should care – the White House is seeking every and all possible advantage to force Iran to the bargaining table)

Nvidia said it was investing $3.5 billion in Taiwanese fabless semiconductor company MediaTek; Nvidia's investment is part of MediaTek's record $3.9 billion overseas ​convertible bond offering, which also includes Alphabet – Reuters. (Why you should care – as part of the investment, MediaTek will let customers use Nvidia’s technology to design their own chips)

Japanese companies raised capital spending in the second quarter as profits surged; capital expenditure excluding software gained 2.9% from the previous quarter in the three months through June, according to the Finance Ministry – Bloomberg. (Why you should care – sales rose 5.9% and profits grew 24.6% compared to the year prior, fueling the spending)

Economic Calendar:

Earnings: CRDO, DELL, MDB, MDT, PANW

Germany - Retail Sales for July (2 a.m.)

Eurozone - HCOB Eurozone Manufacturing PMI (Final) for August (4 a.m.)

U.K. - BoE Consumer Credit for July (4:30 a.m.)

U.K. - S&P Global U.K. Manufacturing PMI (Final) for August (4:30 a.m.)

Eurozone - CPI for August (5 a.m.)

Fed's Barr (Board, Voter) Speaks (9:05 a.m.)

U.S. - S&P Global U.S. Manufacturing PMI (Final) for August (9:45 a.m.)

U.S. - ISM Manufacturing PMI for August (10 a.m.)

U.S. - JOLTS Job Openings for July (10 a.m.)

Treasury Auctions $85 Billion in 6-Week Bills (11:30 a.m.)

Treasury Auctions $52 Billion in 52-Week Bills (11:30 a.m.)

U.S. - American Petroleum Institute Crude Oil Inventory Data (4:30 p.m.)

ECB's Nagel (Germany) Speaks (8:30 p.m.)

Australia - GDP for Q2 (9:30 p.m.)

Reserve Bank of New Zealand Monetary Policy Announcement (10 p.m.)

Reserve Bank of New Zealand's Breman (Governor) Speaks (11 p.m.)