What Will Stocks Do If the Fed Raises Rates?

Stocks have in recent decades tended to rise in the year after the start of a rate-hike cycle.

Traders widely expect an interest-rate hike—the first in more than three years—from the Federal Reserve when it meets next week. What’s next for stocks if that happens? If history is any guide, which is hardly guaranteed, they may lose steam before recovering.

The first four months after the start of a rate-increase cycle on average saw negative returns for the S&P 500 in the six such cycles since 1994, LPL Financial Chief Equity Strategist Jeff Buchbinder said in a recent note. That would take us into early 2027. The benchmark index was up about 11% this year through Thursday’s close.

The index’s performance tended to improve over time, according to LPL, with average 12-month returns of nearly 7% and a median gain of near 11% after the start of a rate-increase cycle. (Using the median smooths out a more than 40% gain that started in March 1997.)

Stocks, however, don’t always rise in the year after the start of rate hikes. They were down 12 months after the start of the last cycle of increases, which coincided with the end of the pandemic.

The U.S. central bank is contemplating a rate increase to deal with stubborn inflation . A hike on Wednesday would mark the first one since July 2023, when the Fed lifted rates to a range of 5.25% to 5.50%. They’re currently at 3.50% to 3.75%, with futures traders currently placing the likelihood of a 25-basis-point hike at nearly 86%, according to the CME Group’s FedWatch tool.