Rate Hikes Are Not a Sell Signal, New Highs Are Not a Sell Signal Either

Original Title: History Says 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 an important step in the current policy cycle's shift back to rate hikes. Just days later, U.S. tech stocks quickly regained lost ground, with the Nasdaq Composite Index hitting a new all-time high on September 22. This has created a seemingly contradictory combination: monetary policy is tightening, yet the stock market is simultaneously reaching record highs.

The most intuitive conclusion in the market is that rate hikes imply pressure on valuations, while record highs suggest limited upside potential. However, Phil Rosen offers another perspective in Opening Bell Daily: both rate hikes and new highs cannot be interpreted in isolation from the economic environment at the time.

He cites historical data indicating that since 1982, the average return of the S&P 500 in the 12 months following a Fed rate hike has been higher than that following a rate cut; and from a longer-term perspective, the subsequent performance of stocks bought near historical highs has not been significantly weaker than on other trading days.

This set of data does not imply that "rate hikes are good for U.S. stocks," nor does it prove that the current market will necessarily continue to rise. What it truly challenges is a simpler trading logic: merely relying on "Fed rate hikes" or "index new highs" is not sufficient to justify a bearish outlook on the market. What needs to be assessed is why the Fed is raising rates at this time and whether the earnings and economic conditions supporting the stock market's rise still exist.

The following is a translation of the original text:

The Fed has just raised rates, yet the U.S. stock market has once again reached historical highs.

On September 16, the Fed raised the target range for the federal funds rate by 25 basis points to 3.75%-4.00%. The FOMC stated that U.S. economic activity continues to expand at a "robust pace," domestic 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 set a new historical record. Reuters linked the rebound to multiple factors, including the strength of tech stocks, renewed interest in AI trading, and a drop in oil prices.

Performance of major asset markets on September 22, with the Nasdaq rising 0.45% that day and a year-to-date increase of 17.22%. Source: Opening Bell Daily

On the surface, "rate hikes + historical highs" seems to be two signals that warrant caution: higher rates may compress stock valuations, while the index being at record levels could lead investors to worry that prices have risen too much.

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

Rate Hikes Are Not a "Bearish Button": Average Returns After Rate Hikes Are Higher

Opening Bell cites data compiled by Charlie Bilello, Chief Market Strategist at Creative Planning, stating that since 1982, the average return of the S&P 500 in the 12 months following a Fed rate hike has been 14.9%; while the average increase in the 12 months following a rate cut has been 11.2%.

Average forward returns of the S&P 500 after Fed rate hikes since 1982 are generally higher than after 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, a decrease in interest rates means lower financing costs and a lower discount rate for future cash flows, which should theoretically be more favorable for stocks; rate hikes would 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 point in time?

Generally speaking, when the Fed is able to raise rates, it often indicates that the economy still possesses a certain degree of resilience. Corporate earnings, employment, and consumption may still remain robust, allowing the Fed the space to suppress inflation through higher rates.

Conversely, rate cuts often occur in a different macroeconomic environment: slowing economic growth, deteriorating labor markets, financial system pressures, or rising recession risks.

Therefore, Rosen's core judgment is not that "rate hikes drive the stock market up," but rather: monetary policy itself has an endogeneity. Rate decisions not only affect future economic conditions but also reflect the current state of the economy.

In other words, if one ignores the economic cycle and equates "rate hikes" with "bearish for stocks," it is easy to misunderstand the causal relationship.

What Really Matters Is Not the Direction of Rates, But the Economic State Behind Rate Hikes

This logic is especially important in the current environment.

The economic description given by the Fed during this rate hike is not weak. The official statement indicates that the U.S. economy continues to expand steadily, domestic spending remains resilient, productivity growth is strong, capital investment is solid, and employment growth is generally matching labor supply; meanwhile, inflation remains above policy targets.

This suggests that at least from the Fed's current policy judgment, this rate hike is not tightening further in the context of a clearly declining economy, but rather continuing to address inflation against a backdrop of resilient growth.

This is also why simply seeing the words "Fed rate hike" is not sufficient to directly infer the direction of the stock market in the next phase.

The truly important question is: As rates remain high, can corporate earnings, consumer spending, and employment continue to absorb tighter financial conditions?

If so, then rate hikes themselves may not be enough to end the upward trend; if high rates ultimately drag down demand and earnings, then the historical average returns will also lose their explanatory power for the current market.

New Highs Are Not a Sell Signal Either; Historical Data Even Slightly Favors Buying

A similar logic applies to another common concern: "Is it still worth buying now that we are at historical highs?"

Opening Bell cites FactSet data stating that since 1950, buying when the S&P 500 reaches a historical high has yielded an average return of about 9.5% in the following 12 months; in contrast, the average one-year return from buying on other trading days is about 9.3%.

Average returns after buying at historical highs versus other trading days since 1950. One-year returns are 9.5% and 9.3%, respectively; five-year returns are 51.8% and 49.0%.

Independent data also shows similar conclusions. Vanguard's statistics based on FactSet and Morningstar Direct data indicate that as of September 2025, the average return one year after buying the S&P index at historical highs is also 9.5%, while on other trading days it is about 9.2%; over three and five years, the cumulative average returns after buying at historical highs also do not lag significantly. The two sets of data show a 0.1 percentage point difference in specific values for "other trading days," which may relate to sample cut-off dates and data processing methods, but the overall direction is consistent.

What is truly noteworthy here is not that historical highs yield slightly more returns than ordinary trading days, but rather that historical highs themselves do not exhibit stable negative predictive power.

Rosen explains that market records often occur in succession. A continuously rising market may keep setting new highs, and the first, fifth, or even tenth time a new high is reached cannot tell investors when a bull market will end.

Thus, "prices are already high" and "prices will soon fall" are not the same judgment. More accurately, historical data can only indicate that being at historical highs is not sufficient evidence to conclude that future returns will deteriorate.

What to Watch Next with Rate Hikes and New Highs?

From this framework, what is most worth observing in the current U.S. stock market is not the static facts of "the Fed has already raised rates" or "the Nasdaq has reached new highs," but whether the macro conditions supporting them will change.

On one hand, it is necessary to continue observing whether U.S. corporate earnings, consumption, and employment can maintain resilience. If the real economy can still withstand higher rates, then the historical explanation of "rate hikes occurring in a strong economic phase" remains valid.

On the other hand, it is essential to monitor whether tightening policies begin to produce more pronounced lagging effects. If interest-sensitive sectors such as housing and automobiles weaken further and gradually transmit to consumption, employment, and corporate profits, then the implications of this rate hike will change.

Historical average data must also be used cautiously. The inflation levels, valuations, earnings environments, and financial conditions during different rate hike cycles since 1982 have not been the same; past average returns after buying at historical highs cannot directly infer that similar returns will be achieved in the next 12 months.

Therefore, this set of data is more suitable for ruling out an overly simplistic judgment rather than providing new certainties for trading signals: rate hikes do not inherently mean U.S. stocks should fall, and historical highs do not inherently mean the market has ended.

What will determine the next phase of market direction remains that more fundamental question—can the economy and earnings continue to support current prices?

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