Goldman Sachs: Fed Rate Hikes Won’t End the S&P 500 Bull Market: Earnings Still Matter More

Investors often treat Federal Reserve rate decisions like the ultimate market signal. When rates start climbing, many expect stocks to stumble. History shows short-term pressure is common. Yet a recent analysis from Goldman Sachs strategists, led by Ben Snider, challenges the idea that higher rates automatically end a bull market. Their view is straightforward: valuations may take a hit, but earnings growth still drives equity returns more than anything else.

This article breaks down that perspective in plain language. It covers what the bank is saying about the current setup, how past rate-hike cycles played out for the S&P 500, why earnings matter so much right now, and what risks investors should still watch. By the end, readers will have a clearer sense of why some Wall Street teams remain constructive even as the Fed prepares to tighten policy again.

In September 2026, markets have been pricing in a high chance of the Federal Reserve delivering its first rate increase in three years. Stronger-than-expected inflation readings and solid economic growth have shifted expectations. The 10-year Treasury yield has hovered near 5%, while the 30-year yield has reached levels not seen in nearly two decades. Higher bond yields typically compress stock valuations because future corporate profits are discounted at higher rates.

The Pressure from Rising Bond Yields

When long-term interest rates rise, investors recalculate the present value of stocks. A higher discount rate reduces the present value of expected future earnings. That mathematical reality is why equity valuations often come under pressure once the market starts pricing in meaningful Fed tightening. The recent move in Treasury yields has already produced visible effects across the S&P 500.

Goldman Sachs acknowledges this headwind. The S&P 500’s forward price-to-earnings ratio has already slipped from about 22 times at the start of 2026 to around 19 times more recently. Despite that compression, the index has stayed within roughly 2% of its record high. That resilience points to something stronger than pure multiple expansion: actual profit growth.

What Markets Have Already Priced In

Ben Snider and his team have noted that markets have already priced in more than three quarter-point rate increases by the middle of 2027. In their view, the bar for a true hawkish surprise is relatively high. At the same time, corporate balance sheets remain healthy, and earnings momentum has been impressive. This combination, they argue, supports the continuation of the bull market even if rates rise.

The fact that so much tightening is already reflected in bond prices and futures markets changes the near-term risk profile. A single 25-basis-point move that most participants expect is less likely to shock equities than an unexpected series of larger hikes would. Still, the path matters. Gradual increases that keep pace with growth tend to be absorbed more smoothly than rapid tightening aimed at crushing inflation.

Why Earnings Provide a Cushion

The drop in the forward P/E ratio from 22 to 19 would normally signal that a more expensive market is becoming cheaper. Yet the index has barely retreated from its highs. The reason is straightforward: the denominator in that valuation multiple, earnings, has grown quickly enough to offset the lower multiple. Strong second-quarter results and upward revisions to full-year forecasts have kept the overall market supported even as rates climbed.

Healthy balance sheets add another layer of resilience. Companies carrying manageable debt levels and solid cash flow are better positioned to handle higher borrowing costs. That financial strength reduces the chance that rising rates quickly translate into widespread earnings disappointments or forced deleveraging.

Balancing the Near-Term Risks

None of this means rate hikes are irrelevant. History shows that the first few months after the start of a tightening cycle often bring softer equity returns. Volatility can rise as investors adjust portfolios and sectors rotate. Rate-sensitive areas such as housing-related stocks typically feel more immediate pressure, while financials can benefit from wider net interest margins.

What the Goldman Sachs analysis underscores is that these short-term adjustments do not automatically end a bull market. When corporate profits continue to expand and balance sheets stay robust, the longer-term trend has frequently reasserted itself once the initial rate shock fades. The current setup already has substantial tightening priced in, solid earnings growth, and healthy corporate finances, giving that historical pattern a credible foundation to repeat.

Investors watching the Fed’s next moves would do well to keep both sides of the ledger in view. Higher rates are a genuine valuation headwind. At the same time, the strength of earnings and the amount of tightening already discounted by the market help explain why the S&P 500 has held near record levels even as the forward multiple has compressed. That balance is what keeps the bull-market case intact for now.

Looking back at seven rate-hike cycles over recent decades offers useful context. In the three months after the first hike, the S&P 500 has, on average, declined about 2%. The odds of a positive return in that short window have been low, around 29%. That pattern aligns with the common concern that stocks struggle when the Fed begins tightening.

The longer view looks different. Over the full 12 months following the first rate increase, the S&P 500 has delivered an average gain of roughly 9%. Positive returns occurred in every episode except 2022. One illustrative case is 1997: the index fell about 10% during a modest 25-basis-point hiking period, then recovered and reached new highs within a few months once the market stopped pricing further aggressive tightening.

These numbers do not guarantee the same outcome this time. Every cycle has unique features; growth, inflation, fiscal policy, and geopolitics all play roles. Still, the historical record suggests that an initial bout of volatility does not automatically turn into a lasting bear market when earnings hold up.

Other Wall Street teams have echoed parts of this message. Strategists at firms including Morgan Stanley and JPMorgan have also pointed to healthy corporate profits as a reason any pullback tied to the first hikes is more likely to prove temporary than the start of a prolonged downturn. The shared theme is that a measured tightening path, paired with resilient earnings, is a different environment from the sharp inflation shock and aggressive hiking cycle of 2022.

Goldman Sachs has repeatedly emphasized that corporate earnings, not valuation multiples, have powered much of the recent advance in U.S. stocks. Their forecasts illustrate the point. The bank projects S&P 500 earnings per share of $340 in 2026, representing about 24% year-over-year growth, and $385 in 2027, a further 13% increase. Earlier in 2026, the team raised its year-end index target to 8,000, reflecting upgraded profit expectations after a strong first-quarter reporting season.

A meaningful share of that growth has been tied to companies benefiting from artificial intelligence infrastructure spending. Those businesses have contributed roughly half of the expected earnings expansion in some periods. At the same time, the broader market has shown solid results. The second-quarter earnings season was described as one of the strongest on record, with many companies beating estimates by wide margins and their balance sheets remaining in good shape.

When valuations compress but profits rise, the index can still grind higher. That is essentially what has happened so far in 2026. The forward P/E has come down, yet the S&P 500 has remained near its highs because the earnings denominator has grown. As long as that profit trajectory continues, Goldman’s strategists see room for the bull market to persist even with higher policy rates.

This focus on earnings is not new. Over long periods, stock market returns have been driven far more by the growth in corporate profits than by changes in the multiples investors are willing to pay. Multiples matter a great deal in the short run and can amplify moves in either direction. Over multi-year horizons, though, the path of earnings tends to dominate.

Sector Differences and Where Pressure May Appear

Not every part of the market reacts the same way to rising rates. Goldman’s analysis and broader market commentary highlight clear differences. Companies in housing and other rate-sensitive sectors often face greater pressure because higher borrowing costs can slow demand. Financial stocks, by contrast, frequently benefit from a steeper yield curve or wider net interest margins.

The speed of any rate of increase also matters. Historical studies of post-World War II tightening cycles show that faster hiking paths have tended to produce deeper drawdowns than slower, more gradual ones. If the Fed delivers only measured increases while growth stays solid, the equity market has historically handled that environment better than a rapid series of hikes aimed at crushing inflation.

Investors watching the current setup are also monitoring oil prices, geopolitical risks, and potential seasonal weakness in September. Those factors can add near-term volatility even if the medium-term earnings story remains intact. The key distinction Goldman draws is between a temporary “rate shock” that squeezes valuations and a true bull-market killer that would require a meaningful deterioration in profits or balance-sheet health.

No constructive view is risk-free. Several developments could challenge the thesis that earnings will continue to outweigh rate pressure. A prolonged and aggressive hiking cycle that pushes the economy into a sharper slowdown would clearly threaten profit growth. If inflation becomes de-anchored and forces the Fed into a more hawkish stance than is currently priced in, the equity risk premium could widen further.

Geopolitical shocks that drive energy prices higher for an extended period could squeeze consumer spending and corporate margins simultaneously. Narrow market leadership, where a handful of large technology and AI-related names account for a large share of both returns and earnings growth, also leaves the index more vulnerable if those specific companies disappoint.

Valuations relative to bonds remain an important watchpoint. The gap between the S&P 500 earnings yield and real Treasury yields has stayed reasonably stable, but a further sharp rise in long-term yields could test that relationship. Goldman has noted that the market already embeds substantial tightening, which raises the hurdle for policy to surprise on the hawkish side. Still, surprises happen.

For individual investors, the practical takeaway is not to ignore rates entirely. Higher policy rates raise the cost of capital, affect different sectors unevenly, and can create short-term volatility. The more useful approach is to focus on whether corporate fundamentals are holding up. Strong balance sheets, rising earnings, and reasonable valuations relative to the growth outlook have historically been better guides than any single Fed meeting.

The core message from the Goldman Sachs analysis is measured optimism rather than blind bullishness. Rate hikes are a genuine headwind for valuations. History shows the first few months after the start of a tightening cycle often bring soft performance. Yet the same history shows that when earnings remain robust, stocks have frequently recovered and delivered solid gains over the subsequent year.

In the current environment, several supportive elements are present: markets have already priced in a meaningful amount of tightening, corporate profits have been growing at a healthy clip, and balance sheets look solid. Those factors help explain why the S&P 500 has stayed near record levels even as the forward P/E has compressed.

None of this removes the need for caution. Markets can and do experience corrections. Sector rotation is likely as rates rise. Investors who rely solely on the hope that “this time is different” without watching actual earnings results are taking unnecessary risk. Conversely, those who sell solely because the Fed is expected to hike may be overlooking the earnings support that has carried the market this far.

A balanced approach involves monitoring the incoming data on inflation, growth, and corporate results while remembering that the stock market is ultimately a claim on future profits. When those profits are rising and companies are financially healthy, higher rates have rarely been enough on their own to end a bull market.

As the Federal Reserve prepares for its next policy decision, attention will rightly focus on the path of rates. Goldman Sachs’ recent commentary offers a useful reminder that rates are only one input. The more important question for equity investors remains whether companies can keep delivering the earnings growth that has underpinned the advance so far.

The historical pattern of modest near-term pressure followed by positive 12-month returns is encouraging but not predictive. What matters most is how the current cycle unfolds for corporate profits. If earnings continue to expand at a solid pace and balance sheets stay strong, the bull market has a credible foundation to continue even as rates move higher.

For readers following the market, the practical steps are straightforward: stay informed on earnings reports and guidance, watch how different sectors respond to higher rates, and avoid overreacting to any single Fed announcement. The relationship between monetary policy and stock prices is real, but it is rarely the whole story.

Do Fed rate hikes always cause the stock market to fall?

Not always. Short-term pressure is common in the first few months, but longer-term returns have often been positive when the economy and corporate profits remain healthy.

Why does Goldman Sachs think the bull market can continue?

The bank highlights that markets have already priced in several rate increases, corporate earnings and balance sheets look robust, and earnings growth has historically been a stronger driver of stock returns than rate changes alone.

How much has the S&P 500’s valuation changed in 2026?

The forward price-to-earnings ratio has declined from around 22 times early in the year to about 19 times more recently, while the index has stayed close to its highs thanks to earnings growth.

What are Goldman’s earnings forecasts for the S&P 500?

The firm has projected roughly $340 in earnings per share for 2026 (about 24% growth) and $385 for 2027 (about 13% growth).

Which sectors tend to struggle or benefit when rates rise?

Rate-sensitive areas, such as housing-related companies, often face pressure. Financial stocks can benefit from higher rates and a steeper yield curve.

Is the current situation similar to 2022?

The 2022 cycle featured a sharper inflation shock and more aggressive hiking. Current conditions feature markets that have already priced in substantial tightening and stronger recent earnings momentum.

Should investors sell stocks before the Fed hikes?

History suggests that selling solely because a hike is expected has often proven costly if earnings remain solid. A more useful focus is on company fundamentals and overall portfolio risk tolerance.

What could still end the bull market according to this view?

A prolonged aggressive hiking cycle that damages growth and profits, a sustained inflation surge that forces much tighter policy, or a meaningful deterioration in corporate earnings would pose greater risks than a measured rate increase alone.

The conversation around Fed policy and stocks will continue to evolve with each data release and each FOMC meeting. What remains constant is the importance of looking past the headlines to the underlying drivers of corporate profits. That focus, more than any single rate decision, has shaped the market’s path so far and is likely to matter most in the months ahead.

Disclaimer: This article is for informational and educational purposes only. It does not constitute financial, investment, or legal advice. Cryptocurrency investments carry significant risk and high volatility. Always conduct your own research (DYOR) and consult a qualified financial advisor before making any investment decisions. Past performance is not indicative of future results.