Near-Certain Hike, Uncertain Signals
Traders appear to have all but locked in what the Federal Reserve will announce at this week's meeting, yet the market consequences remain murky. Futures imply roughly a 93% chance that policymakers raise rates when their gathering wraps up Wednesday. With inflation running at 3.4%, longer-dated Treasury yields jumping, and a hawkish Jackson Hole address from Fed chair Kevin Warsh, investors are convinced the next rate move is upward. Even so, uncertainty persists over how Warsh and colleagues will telegraph future steps, since he dislikes forward guidance. He has often sounded aggressive on inflation, but with midterms only weeks off and President Donald Trump pressing him to cut rates, his true appetite for tightening is unclear.[S1]
Rate increases are usually unwelcome on Wall Street, yet this one could be greeted warmly because it would cement Warsh's standing and show he is serious about containing inflation. Should the Fed hold rates steady instead, equities might tumble on fears that price growth is overheating. On the other hand, investors could welcome no change, since higher rates can drag on earnings growth, which underpins stock valuations.[S1]
What History Says About Stocks After a First Hike
Because a hike is so widely anticipated, Goldman Sachs used a Friday client note to study how equities have responded historically once the Fed begins raising rates. Looking back to 1988, the S&P 500 has on average declined following the first increase. Its median return roughly three months afterward sits near -4%, and the average return has troughed around -4% about two months post-hike. That points to the two-to-three-month window as the best moment to buy a dip. Six months out, both median and average returns turn positive, and at the 12-month mark the median S&P 500 gain reaches 9%.[S1]
Goldman noted that equities usually find a floor and rebound once investors anticipate the tightening cycle ending. With several hikes already reflected in prices, the bank argued a steep sell-off is unlikely. Ben Snider, its chief US equity strategist, wrote that stocks often falter when the Fed begins hiking, though the bank still sees the bull market persisting. He said the rates market already discounts more than three quarter-point increases by mid-2027, raising the bar for a hawkish surprise. Sector results after the first hike have varied, but since 1988 energy and tech have led on average, each gaining 4% in the first three months.[S1]
