Goldman Sachs: S&P 500 Expected to Rally Despite Rising Treasury Yields

Goldman Sachs Research indicates that US equities have historically recovered from initial declines following Federal Reserve rate hikes. The firm’s analysis of seven recent hiking cycles shows that while the S&P 500 has averaged a 2% drop in the three months after the first increase, it has delivered a 9% average gain over the subsequent 12 months. This pattern held true in every instance except for the 2022 cycle, suggesting that the medium-term impact of monetary tightening is often less severe than immediate market reactions imply.

Ben Snider, chief US equity strategist, notes that the market has already priced in significant monetary tightening, with interest-rate markets anticipating multiple increases by mid-2027. Consequently, the risk of a hawkish surprise is diminished. Snider emphasizes that the ultimate effect on equities depends less on the level of rates and more on how tightening influences earnings growth, which remains the primary driver of stock performance. The firm argues that current valuations reflect this uncertainty, as the S&P 500 forward price-to-earnings ratio has compressed from 22x to 19x this year.

Valuation Metrics Remain Steady

Despite the decline in equity multiples, the relative valuation of stocks compared to bonds has remained roughly unchanged. The gap between the S&P 500 earnings yield of 5.2% and the real 10-year Treasury yield of 2.6% stands at approximately 270 basis points. This spread, serving as a proxy for the equity risk premium, has been stable over the past two years outside of brief selloffs. Ten-year US Treasury yields have risen to about 5%, their highest level since 2007, driven by strong economic growth, rising oil prices, and investment in artificial intelligence.

Corporate balance sheets appear insulated from near-term rate pressure because most large-company debt carries fixed rates and long maturities. Companies can further counteract the drag of higher rates on valuations by accelerating growth through capital expenditure or mergers and acquisitions. The firm’s data, as reported by GN stocks/sp500, suggests that the combination of these factors supports a resilient outlook for the index even as long-term interest rates remain elevated.

Sector Performance Lacks Consistency

There is no reliable pattern for sector performance when the Federal Reserve begins increasing rates. Historical data shows that energy and technology companies have delivered the strongest average returns in the three months following an initial hike. Conversely, healthcare has posted the weakest average returns during the same period. However, no single sector has consistently outperformed or underperformed across all hiking cycles, indicating that broad market drivers rather than sector-specific dynamics dominate the initial reaction to monetary policy shifts.

Market Pricing Reflects Future Hikes

The surge in Treasury yields is partly attributed to the repricing of the Federal Reserve’s policy path. Economists expect the Federal Open Market Committee to raise its policy rate by 25 basis points this week, following core consumer price inflation in August that exceeded consensus estimates. The firm’s rate strategists believe that the persistence of elevated long-term rates is supported by structural factors, including AI investment and robust economic growth. This environment creates a backdrop where equity valuations must be justified by earnings growth rather than multiple expansion.