Fed Rate Hike Expectations and S&P 500 Historical Performance

Futures traders assign an 86% probability to a 25 basis point rate hike by the Federal Reserve. This would mark the first increase since July 2023, when rates reached a range of 5.25% to 5.50%. Current benchmark rates stand at 3.50% to 3.75%.

The S&P 500 index has gained 11% this year through Thursday. LPL Financial data indicates that the first four months of a rate-increase cycle have produced negative average returns in six of six instances since 1994. This pattern would project equity weakness into early 2027.

Historical Equity Returns After Hikes

Average 12-month returns following the start of a rate-increase cycle are nearly 7%. The median gain is near 11%. These figures exclude a more than 40% gain that began in March 1997, which skews the average higher.

Stocks did not rise in the 12 months following the last rate-increase cycle. That period coincided with the end of the pandemic and heightened recession risks. Current recession risks are described as low by analysts.

Recession Risks and Market Outlook

LPL Financial Chief Equity Strategist Jeff Buchbinder states that rate hikes do not typically derail bull markets. He notes that rising recession risks change this dynamic. Today’s recession risks are low by all accounts.

The Federal Reserve is considering a hike to address stubborn inflation. The decision is expected at the meeting next week. Market sentiment reflects high confidence in the timing of the move.

Market Expectations and Data Sources

CME Group’s FedWatch tool provides the 86% probability figure. This data point is central to current trading strategies. Investors are positioning portfolios based on these odds.

GN markets/policy (en-US) reports on these financial developments. The source provides context for the upcoming central bank decision. Historical comparisons help frame potential equity market reactions.