US stocks could remain under pressure in the short term after the Federal Reserve increased its benchmark interest rate, but historical market data indicates that equities have often recovered over the year following the beginning of a rate-hiking cycle. Goldman Sachs Research said the S&P 500 has posted an average 12-month gain of 9 per cent across previous US monetary tightening periods.
Fed Raises Benchmark Rate
The Federal Open Market Committee voted unanimously, 12-0, to lift the federal funds target range by 25 basis points to 3.75-4 per cent. The decision marked the first increase in the benchmark rate since 2023, as policymakers responded to continuing inflation concerns and changing economic conditions.
The move did not come as a major surprise to financial markets. Traders had assigned a probability of more than 90 per cent to a quarter-point increase before the Federal Reserve announcement, according to the market pricing cited in the Goldman Sachs assessment.
Stocks Have Often Recovered Over Time
Goldman Sachs noted that US equities have historically found it difficult to gain momentum during the initial stages of Federal Reserve tightening. However, the broader performance picture has generally improved over a longer period.
Ben Snider, chief US equity strategist at Goldman Sachs Research, said the S&P 500 fell by an average of 2 per cent during the first three months of seven rate-hiking cycles examined over recent decades. Over the subsequent 12 months, however, the index recorded an average gain of 9 per cent. The S&P 500 produced a positive return in all of those episodes except the rate-hiking period in 2022.
Markets Already Expect More Rate Increases
Goldman Sachs also pointed to the amount of future monetary tightening already reflected in interest-rate markets. Several additional Federal Reserve rate increases are currently priced in through the middle of 2027.
That positioning could make a major hawkish surprise less likely, since investors have already incorporated a substantial amount of expected policy tightening into market prices. The actual effect on stocks, however, will continue to depend on incoming inflation, employment and economic growth data.
Treasury Yields Remain Elevated
The rise in interest rates comes as the 10-year US Treasury yield has moved to about 5 per cent, its highest level since 2007. Higher Treasury yields can influence the relative attractiveness and valuation of equities, particularly when investors reassess the value of future corporate earnings.
Stock valuations have also become less expensive compared with the beginning of 2026. The forward price-to-earnings ratio for the S&P 500 has declined from roughly 22 times at the start of the year to about 19 times, according to Goldman Sachs. The valuation gap between equities and bonds, however, has remained broadly stable.
Equity Risk Premium Shows Limited Change
The S&P 500 currently has an earnings yield of about 5.2 per cent, compared with an inflation-adjusted 10-year Treasury yield of approximately 2.6 per cent. The resulting spread is around 270 basis points.
Snider said this difference, which is commonly used as a simple measure of the equity risk premium, has remained relatively steady over the past two years outside periods of short-lived market selling.
Rate Impact Differs Across Companies
Goldman Sachs found no consistent pattern showing that one particular stock-market sector regularly outperforms or underperforms during Federal Reserve rate-hiking cycles. The response has varied across individual episodes and market conditions.
Rising yields can nevertheless create greater pressure for so-called long-duration stocks. These companies generally have expectations of strong future growth but comparatively modest current profits, meaning changes in interest rates can have a larger effect on how investors value their expected future earnings.
Interest rates can also influence corporate earnings, debt-servicing capacity and overall equity valuations. According to Snider, those risks currently appear limited, although the market response will depend on how monetary policy and the broader US economy develop.