Goldman: S&P 500 Falls 2% Then Gains 9% After Fed Hikes

Goldman Sachs Research indicates that the S&P 500 has historically averaged a 2% decline in the three months following the start of a Federal Reserve hiking cycle. This short-term dip is part of a broader pattern where the index averages a 9% gain over the subsequent 12 months, a trend observed in six of the last seven cycles, with 2022 being the sole exception.

The Fed recently initiated a new tightening phase by raising its target range to 3.75%-4.00%, marking its first increase since 2023. According to chief US equity strategist Ben Snider, the medium-term impact on equities depends primarily on how tightening affects corporate earnings growth. Goldman notes that current market pricing for multiple hikes through mid-2027 reduces the likelihood of a significant hawkish surprise from the central bank.

Yield velocity drives equity volatility

The 10-year Treasury yield has climbed to approximately 5%, the highest level since 2007. Goldman Sachs identifies the speed of this rise as a critical risk variable, noting that stocks have typically fallen when yield increases exceed two standard deviations. This threshold corresponds to a monthly rise of roughly 50 basis points or a biweekly jump of 30 basis points.

Since about 75% of the S&P 500's present value is derived from cash flows occurring ten or more years in the future, long-duration assets are most sensitive to these yield shifts. The report highlights that rapid bond moves, rather than the absolute level of rates, are the primary driver of equity stress in this environment.

Sector exposure varies by debt structure

Corporate sensitivity to rising rates is not uniform across the market. Large US companies appear largely insulated in the near term because their debt portfolios consist mainly of fixed-rate, long-dated instruments. In contrast, smaller firms face higher exposure due to their reliance on variable-rate financing and shorter-term liabilities.

Within the S&P 500, housebuilders and long-duration growth stocks are identified as the most vulnerable sectors to sharp yield increases. Financials occupy the opposite end of this spectrum, often benefiting from higher rates. However, Goldman Sachs cautions that no single sector has reliably outperformed or underperformed in the period immediately following a first rate hike.

Equity risk premium remains stable

Despite the S&P 500 forward P/E ratio contracting from 22x to 19x this year, the equity risk premium has remained stable. The gap between the index's earnings yield and the real 10-year yield has held near 270 basis points for two years. This stability suggests that valuation adjustments have partially offset the rising cost of capital for investors.

Goldman Sachs attributes the recent rise in long-term yields to higher oil prices, a repricing of the Fed's policy path, strong economic growth, and increased investment in artificial intelligence. The firm emphasizes that monitoring daily Treasury moves is as critical as tracking the Fed calendar for identifying potential equity stress signals.