History Suggests S&P 500 Wobbles Then Recovers After Fed's First Hike Since 2023

For traders, the speed at which bond yields change is a key risk factor, not merely their absolute level. If the 10-year yield were to spike again in a way that Goldman links to equity market strain, that would serve as the most obvious caution signal, making daily Treasury moves as important as the Fed's schedule. Sectors like homebuilders and long-duration growth names, which are particularly rate-sensitive, would respond fastest. Financial stocks, by contrast, are on the opposite side of the scenario.

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Goldman's core point is that equities typically dip when the Fed begins raising rates and then bounce back within twelve months, though the speed of the increase in long-term yields is just as important as their final level.

Key findings:

• According to Goldman Sachs Research, the S&P 500 has posted an average 2% drop during the first three months of seven Fed hiking cycles, followed by a 9% rise over the subsequent twelve months, with all episodes except 2022 showing positive returns.
• Long-term yields have the greatest impact on equities. The 10-year Treasury yield currently stands near 5%, the highest level since 2007, and around 75% of the S&P 500's present value is derived from cash flows expected a decade or more into the future.
• The rate of change is a concern. Historically, stocks have climbed along with rising rates, provided the pace did not exceed two standard deviations above the norm—a threshold Goldman estimates at approximately 50 basis points over one month or 30 basis points over two weeks.
• The S&P 500's forward price-to-earnings ratio has contracted from 22x to 19x this year, yet the spread between its earnings yield and the real 10-year yield, which serves as a measure of the equity risk premium, has remained close to 270 basis points for two years.
• Sensitivity differs markedly. Fast-growing companies with long-duration profiles and homebuilders are more exposed, while financials typically gain from higher rates. Still, no single sector has consistently outperformed or underperformed after a first rate increase.
• Large US corporations appear largely protected in the near term, given that most of their debt carries fixed rates and longer maturities, whereas smaller firms face higher exposure.

According to Goldman Sachs Research, US equities have historically dipped when the Federal Reserve embarks on a tightening campaign, yet they have typically ended up higher twelve months later. In a September 15 note, chief US equity strategist Ben Snider observed that across seven hiking cycles in recent decades, the S&P 500 saw an average 2% decline in the first three months before recovering to an average 9% gain over one year, with every instance except 2022 showing positive returns. The Fed has now begun such a cycle, raising its target range by a quarter point to 3.75%-4.00% in mid-September, marking the first increase since 2023. This article examines the reasoning behind this pattern and what distinguishes the current environment. It is for educational purposes and does not constitute investment advice.

The historical pattern shows a short-term dip followed by a rebound.

These two averages reflect different time frames. In the near term, the onset of rate increases has historically rattled equities. Over the course of a year, conditions have generally brightened. With only seven cycles to draw on, and given that 2022 broke the pattern, the figures should be interpreted as a historical bias rather than a prediction.

Snider's view is that the medium-term outcome hinges on how tightening influences earnings growth, which he considers the key driver for equities. Goldman additionally points out that rate markets are already pricing in several hikes extending to mid-2027, reducing the chance of a hawkish Fed surprise.

The importance of long-term yields over the policy rate

The 10-year Treasury yield has climbed to roughly 5%, the highest reading since 2007. According to Goldman, August core inflation exceeded forecasts, and the firm's rate strategists attributed the increase in long-term yields to elevated oil prices, a reassessment of the Fed's policy trajectory, robust economic growth, and spending on artificial intelligence.

Equities are most sensitive to long-term yields due to valuation mechanics. A stock's price reflects the present value of its expected future earnings, and higher discount rates reduce that value, particularly for distant profits. Goldman calculates that roughly 75% of the S&P 500's present value is derived from cash flows expected a decade or more ahead, explaining why the index's performance correlates most strongly with shifts in long-term yields rather than short-term rates.

The pace of yield changes is as critical as the level itself.

Goldman's analysis indicates that the rate at which yields increase can have a greater impact than their ultimate level. Over the past few decades, equities have generally generated positive returns even as rates rose, provided the pace did not exceed two standard deviations above the norm. A standard deviation quantifies how atypical a movement is. At present, that threshold corresponds to roughly 50 basis points in the 10-year yield over a month or 30 basis points over two weeks. Snider noted that the rapidity of recent moves helps account for why markets have had difficulty digesting them.

The effect of higher yields on valuations

The S&P 500's forward price-to-earnings multiple has contracted from 22x at the beginning of 2026 to 19x. Goldman ascribes part of the decline to ambiguity regarding AI returns and the sustainability of recent profit growth, and another part to higher interest rates. The picture appears more stable when measured against bonds. The S&P 500's earnings yield — earnings divided by price, the reciprocal of the P/E ratio — stands at 5.2%, compared with a real 10-year Treasury yield of 2.6% after adjusting for inflation. The roughly 270-basis-point spread serves as a simple gauge of the equity risk premium, the additional compensation investors require for holding stocks, and Snider observes that it has remained fairly consistent over the past two years aside from brief sell-offs.

Which sectors are most affected by rising yields

Rate sensitivity differs significantly. According to Goldman, long-duration equities — fast-growing firms with modest present earnings that derive their value from far-off cash flows — are especially exposed. Financial companies generally gain, as their profits and stock prices frequently increase alongside interest rates. AI stocks, similar to the broader tech sector, have exhibited a slight negative correlation with real yields. Homebuilders rank among the most rate-sensitive areas, moving in tandem with bond yields and underperforming the equal-weighted S&P 500 by 16 percentage points since June.

Following the first rate increase, energy and technology have achieved the highest average returns over the subsequent three months, while healthcare has seen the weakest. Goldman emphasizes that no reliable sector pattern exists, so historical outperformance should not be assumed to repeat.

How prepared are companies for elevated borrowing costs?

Goldman sees only modest near-term danger for large corporations. Most debt in the S&P 500 has fixed interest rates and extended maturities, and interest costs are low relative to healthy earnings. Smaller firms typically possess weaker balance sheets and greater exposure to floating-rate debt, making them more vulnerable. Companies can also counterbalance the valuation impact. Goldman estimates that a 1-percentage-point increase in the cost of equity would need a 2-point increase in projected long-term growth to keep valuations unchanged, underscoring the importance of capital expenditure, R&D, M&A, and spin-offs.

Interpreting the data and what could alter the outlook

Historical data provides a guide rather than a guarantee, and the current cycle begins from an unusual starting point, with the 10-year yield at its highest since 2007 following a swift ascent. This makes the pace of bond market movements the key variable. Robust earnings and a gradual rise in yields would align with the wobble-then-recovery pattern. A further sharp increase in long-term yields or disappointing earnings would caution against relying on historical averages.

The reason behind the yield increase is also significant. A prior explainer from InvestingLive on the neutral rate examined why economists are boosting their estimates of the long-run level of rates. If yields climb because markets are upgrading those estimates in response to stronger growth, the implication differs from a rise driven by inflation concerns or anxiety about sovereign debt.

Goldman's report was released a day before the Fed's rate decision, meaning the market data reflects September 15 and could now be outdated. The indicators to watch are the 10-year Treasury yield, US inflation readings, corporate profits, and future Fed moves.