Why strategists are sticking with stocks
The pitch from the Street is straightforward: earnings and the economy look sturdy enough to absorb higher borrowing costs. Goldman Sachs chief US equity strategist Ben Snider put it this way: "Equities typically struggle when the Fed starts to hike rates, but we expect the bull market to continue." He added, "The market is already pricing more than three hikes within the next year, and corporate earnings and balance sheets are both robust."
Morgan Stanley's Michael Wilson isn't ignoring the risk side. If inflation runs hotter, he thinks a pullback is possible, which he characterizes as a decline of 10% from the latest peak.
Market backdrop and the risks investors are watching
Since notching a record in mid-August, stocks have been choppy as investors wrestle with inflation expectations while crude sits north of $100 a barrel. The yield on the 10-year Treasury is lingering just under 5%, a threshold often viewed as a drag on equities. Contracts tied to the tech-heavy Nasdaq 100 fell 1.6% on Monday.
Even with the volatility, the S&P 500 is down less than 2% from the high, and valuations are underpinned by what ranks among the strongest second-quarter earnings seasons on record. Swaps now imply an 87% chance the Fed lifts rates on Wednesday, which would be the first increase in three years.
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What the data and history say
Bloomberg's analysis suggests it typically takes a series of rate hikes, not a one-off move, to truly threaten a bull run. Since 1945, the S&P 500 has experienced 12 bear markets of at least 20%, along with four close calls in the 18% to 20% band. Six of those drawdowns followed tightening campaigns that ran into recession, and only two happened without either of those triggers in the lead-up.
The outlook investors should keep in mind
Wilson's bottom line is that the macro mix matters: "Equities can tolerate stickier back-end yields if they are driven largely by stronger nominal growth," he said, adding, "In other words, equities remain a valuable inflation hedge over the intermediate-term." JPMorgan's team points to oil's near-term moves as the key driver of risk appetite, notes that September often brings softer stock performance, and cautions against turning short-term chop into a long-term narrative. As Mislav Matejka's group wrote, "As long as Fed hikes are measured, and occur against the backdrop of robust growth in earnings, without inflation becoming de-anchored, equities should weather that."
For your wallet, the takeaway is simple: earnings are pulling their weight, oil and rates are setting the mood week to week, and history says the bigger problems usually show up when tightening squeezes the economy into recession. Keep an eye on those three and you will have a better read on your portfolio's path than any single Fed decision.
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