Why stocks can still advance after a Fed hike, according to a Wall Street strategist

By Nora Redmond

The S&P 500 on average delivers returns of just 3% one year after an initial interest-rate hike by the Federal Reserve, compared to returns of 10% otherwise.

The S&P 500 is poised to advance from what's expected to be a less aggressive tightening cycle by the Federal Reserve than in the past as well as strong earnings, according to a Jefferies strategist.

The New York-headquartered investment bank expects the benchmark stock-market index to climb as the incoming third-quarter financial reporting season draws the attention of investors back to earnings growth and gains in productivity from the adoption of artificial intelligence.

"However, the complicated macro backdrop and higher rates will almost certainly cause multiples to continue to compress," Jane Gibbons, equity strategist at Jefferies, wrote in a Wednesday note.

It comes after the Federal Open Market Committee announced its decision to raise rates by one-quarter point to between 3.75% and 4% on Wednesday. In Fed Chair Kevin Warsh's press conference afterwards, he asserted that the central bank was dedicated to bringing inflation back down to its 2% target rate, with 16 FOMC members forecasting one more rate raise before the end of the year, according to the Fed's "dot plot."

"Looking at historical returns for the S&P 500 SPX during the rate hike cycles since 1983, hikes have not been supportive of equity returns," Gibbons said.

Jefferies found that one month after an initial rate raise, the stock index delivers on average, returns of -1.6%. Following three months, the returns average -4.2% - its most "subdued" compared to other periods. After one year, the S&P 500 typically rises, but by an average of just 3%, compared to the non-rate-hiking average of 10%.

But Gibbons noted that while the Fed is heading in the direction of a tightening cycle, with the market expecting two more hikes by December 2027, future raises are predicted to be less significant and slower than in the past.

Gibbons said the information technology and energy sectors have proved to be the best performing on average one year after a rate rise. Energy has on average led to returns of 22.4% in the 12 months following the move, while info tech has produced payoffs of 15.4%.

The worst-performing sectors have historically been discretionary, with returns of -0.5%, and financials, yielding losses of 0.2%.

Jefferies' year-end target for the S&P 500 is set at 8,000, some 6% away from Wednesday's close.

-Nora Redmond

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09-17-26 0554ET