Fed Rate Hike and Market Highs: What Really Drives U.S. Stocks?

History Shows Investors Should Not Fear Fed Rate Hikes or Record Highs

Original author: Phil Rosen, Opening Bell Daily

Editor’s Note: On September 16, the Federal Reserve raised the target range for the federal funds rate by 25 basis points to 3.75%-4.00%, marking a significant step in the current policy cycle’s return to rate hikes. Just days later, U.S. tech stocks quickly recovered their losses, with the Nasdaq Composite Index reaching a new all-time high on September 22. This has created an apparent paradox: monetary policy is tightening, yet stock markets are simultaneously hitting record highs.

The most intuitive market conclusion is that rate hikes put pressure on valuations, and historical highs suggest that upside potential is shrinking. But Phil Rosen, in Opening Bell Daily, offers another perspective: whether it’s rate hikes or new highs, neither can be interpreted in isolation from the prevailing economic environment.

He cited historical data showing that, since 1982, the S&P 500's average return over the 12 months following a Fed rate hike has been higher than after a rate cut; and over a longer time horizon, stock performance following purchases near all-time highs has not been significantly weaker than on other trading days.

This data does not imply that rate hikes benefit U.S. stocks, nor does it prove that the market will certainly continue to rise. What it truly challenges is a simpler trading logic: that “Fed rate hikes” or “indices reaching new highs” alone are insufficient reasons to be bearish on the market. What truly needs to be assessed is why the Fed is raising rates at this time, and whether the earnings and economic conditions supporting stock market gains still exist.

The following is the translated text:

The Federal Reserve has just raised interest rates, yet the U.S. stock market has once again reached a new historical high.

On September 16, the Federal Reserve raised the target range for the federal funds rate by 25 basis points to 3.75%-4.00%. In its statement, the FOMC noted that U.S. economic activity continues to expand at a "solid pace," household spending remains resilient, capital investment is strong, and inflation remains elevated.

Less than a week later, the U.S. tech sector regained strength. On September 22, the Nasdaq Composite Index hit a new all-time high. Reuters linked the rebound to stronger tech stocks, renewed interest in AI trading, and declining oil prices.

Main asset market performance on September 22: The Nasdaq rose 0.45% on the day, with a year-to-date gain of 17.22%. Source: Opening Bell Daily

On the surface, “interest rate hikes + all-time highs” appear to be two warning signs: higher rates may compress stock valuations, and with indices at record levels, investors may worry that prices have risen too much.

However, historical data does not support such a simplistic conclusion.

Opening Bell, citing data compiled by Charlie Bilello, Chief Market Strategist at Creative Planning, reports that since 1982, the S&P 500 has averaged a 14.9% gain in the 12 months following a Fed rate hike, and an average gain of 11.2% in the 12 months following a Fed rate cut.

Since 1982, the S&P 500’s average forward return following Fed rate hikes has been higher overall than following rate cuts, with one-year average returns of 14.9% and 11.2%, respectively.

This result contradicts the most common market intuition.

According to simple asset pricing logic, lower interest rates mean reduced financing costs and a lower discount rate for future cash flows, which theoretically favors stocks; higher rates have the opposite effect. However, Rosen argues that focusing solely on the policy action itself overlooks a more important question: Why is the Fed raising or lowering rates at this particular time?

Generally, the Fed’s ability to raise interest rates suggests that the economy still has some resilience. Corporate profits, employment, and consumer spending may remain robust, giving the Fed room to curb inflation through higher rates.

Interest rate cuts typically occur in another macroeconomic environment: when economic growth is slowing, the labor market is deteriorating, the financial system is under pressure, or the risk of recession is rising.

Therefore, Rosen’s core judgment is not that “rate hikes drove the stock market up,” but rather: monetary policy is inherently endogenous. Interest rate decisions not only influence future economic conditions but also reflect the current state of the economy.

In other words, ignoring economic cycles and equating "interest rate hikes" solely with "negative news for stocks" can easily lead to a misunderstanding of cause and effect.

This logic is especially important in the current environment.

The Federal Reserve's economic assessment accompanying this rate hike was not weak. The official statement noted that the U.S. economy continues to expand robustly, with domestic spending remaining resilient, strong productivity growth, steady capital investment, and employment growth largely in line with labor supply; meanwhile, inflation remains above the policy target.

This means that, at least based on the Fed’s current policy stance, this rate hike is not an additional tightening amid a clearly weakening economy, but rather a continued effort to combat inflation while growth remains resilient.

This is why simply seeing the words "Fed rate hike" is not enough to directly determine the next direction of the stock market.

The real question is: As interest rates remain high, can corporate profits, household consumption, and employment continue to absorb tighter financial conditions.

If so, rate hikes alone may not be sufficient to end the upward trend; if high interest rates ultimately significantly dampen demand and profitability, the historical average returns will lose their explanatory power for the current market.

Similar logic applies to another common concern: “The price is at an all-time high—should I still buy?”

Opening Bell, citing FactSet data, reports that since 1950, buying when the S&P 500 hits a new all-time high has yielded an average return of approximately 9.5% over the subsequent 12 months; in comparison, the average one-year return after buying on other trading days has been about 9.3%.

Since 1950, the average subsequent returns after buying at an S&P 500 all-time high versus other trading days: 9.5% and 9.3% over 1 year, and 51.8% and 49.0% over 5 years.

Independent data yields similar conclusions. Vanguard’s analysis, based on data from FactSet and Morningstar Direct, shows that as of September 2025, the average one-year return after buying the S&P index at a new high was also 9.5%, compared to approximately 9.2% on other trading days; over three- and five-year periods, the average cumulative returns following purchases at new highs showed no significant lag. The two datasets differ by 0.1 percentage points in the specific values for “other trading days,” likely due to variations in sample cutoff dates and data processing methods, but the overall trend remains consistent.

What truly matters here is not that all-time highs yielded slightly higher returns than regular trading days, but rather that all-time highs themselves do not demonstrate consistent negative predictive power.

Rosen's explanation is that market records often occur in succession. A prolonged bull market may continuously set new highs, but the first, fifth, or even tenth new high alone cannot tell investors when the bull market will end.

Therefore, “the price is already high” is not the same as “the price will drop soon.” More accurately, historical data only indicates that the index is at a historical high and is insufficient on its own to serve as evidence of future returns deteriorating.

From this framework, what’s most worth observing in today’s U.S. stock market isn’t the static facts that “the Fed has raised rates” or “the Nasdaq has hit a new high,” but whether the underlying macroeconomic conditions supporting them are changing.

On one hand, it is necessary to continue monitoring whether U.S. corporate earnings, consumption, and employment can remain resilient. If the real economy can still withstand higher interest rates, the historical interpretation that “rate hikes occur during periods of economic strength” still holds.

On the other hand, it is important to observe whether tightening policies are beginning to produce more pronounced lagged effects. If interest-rate-sensitive sectors such as housing and automobiles weaken further and gradually transmit their impact to consumption, employment, and corporate profits, the implications of this rate hike will change.

Historical average data must also be used with caution. Different interest rate hiking cycles since 1982 have varied in terms of inflation levels, valuations, profit environments, and financial conditions; average returns following purchases at historical highs in the past cannot be directly extrapolated to guarantee similar returns over the next 12 months.

Therefore, this set of data is better suited to rule out an oversimplified assumption than to provide new, definitive trading signals: rate hikes do not inherently mean U.S. stocks should fall, and record highs do not inherently mean the rally is over.

What will determine the market’s direction in the next phase is still that more fundamental question: whether the economy and earnings can continue to support current prices.