S&P Equity Sector Performance After Initial Fed Rate Hikes

Additional content provided by Brian Booe, Analyst, Research

On September 9, leading up to the Federal Reserve’s (Fed) much-anticipated rate hike, we wrote about how stocks historically performed after the start of rate-hiking cycles. In short, stocks tended to struggle over the first four months following the policy change before recovering and advancing by the time one year had passed (based on the last six hiking cycles dating back to 1994, with the bear market of 2022 a glaring exception). In today’s market article, we take that analysis a level deeper and provide historical perspective on which equity sectors have done well or poorly early in these past cycles to help investors identify opportunities that can help navigate this new cycle, although past performance does not guarantee future results.

Some of the Winners

Average sector returns six and 12 months after initial Fed hikes are shown in the “Historical Sector Performance After Initial Fed Rate Hikes” chart. First, here are the winners:

Energy. Energy gained an average of 10% and 19% in the first six and 12 months after the initial rate hike. This strong performance makes sense given energy, which is often one of the sources of the inflationary pressures that prompt a hike, can be an effective inflation hedge. In addition, rate hikes tend to come toward the latter part of economic cycles when the economy is running hot, which pushes commodity prices higher and is generally supportive of the sector. It is also worth noting that energy sector returns were supported by the hike on March 16, 2022, which came just three weeks after Russia’s invasion of Ukraine drove energy prices sharply higher.

Although it’s only been a couple of weeks, this pattern has not worked thus far this cycle, as the energy sector has slipped 2.5% since the Fed hike on September 16 (as of 09/28/26), compared with the S&P 500’s 1.9% advance. Clearly the Middle East conflict rather than monetary policy or the economic cycle is the key driver of energy sector performance and is also the key factor underpinning the overweight recommendation from LPL Research’s Strategic and Tactical Asset Allocation Committee (STAAC).

Utilities. The utilities sector has averaged a 6% and a 15% advance over the six and 12 months following initial Fed rate hikes. This strong performance is counter-intuitive because defensive, dividend-paying sectors compete with bonds for yield, and rising rates are a headwind. There are several reasons for the relative strength. First, at a high level the Fed tends to be late to take away the proverbial punch bowl, forcing them to catch up with more aggressive hikes (2022 is a good example). The market’s skepticism about the Fed engineering soft landings helps keep long-term yields down as the Fed raises its short-term benchmark rate. Being in a 40-year bull market in bonds until 2020 didn’t hurt either.

Turning to individual cycles, some of these rate hikes took place during growth scares, which supported utilities, such as the currency crises in Southeast Asia after the Fed hiked rates in 1997 when long-term yields fell. A similar set of circumstances were in place in 2015, centered around China, sending investors to higher yielding investments less sensitive to economic growth. Utilities’ sensitivity to surging oil prices was a factor in utilities’ strength in the 2004 cycle during the China-driven commodities boom.

Turning to the current cycle, utilities have struggled since the September 16 hike, losing 4.3% as the S&P 500 rose 1.9%. We interpret that to mean the market is pricing in solid economic growth. With recession fears low, the long end of the Treasury yield curve is rising, not falling: a recipe for utilities underperformance. STAAC is neutral utilities with a negative bias.

Technology. Another sector in the winners column is technology, which has averaged gains of 13% and 21% in the subsequent six and 12 months following initial Fed rate hikes. On the one hand, the sector’s long-duration characteristics, or interest-rate sensitivity, can make it vulnerable to rising discount rates, as a greater portion of a growth stock’s theoretical value is derived from cash flows further out in the future. Accordingly, technology has sometimes struggled early in rate-hiking cycles, including underperforming during the first month following the last three initial hikes. Over time, however, strong structural earnings growth has tended to help offset the valuation compression associated with tighter financial conditions, as was particularly evident during the rate-hiking campaigns of the 1990s.

Technology has enjoyed market-leading performance since the September 16 hike, gaining 5.9% compared with the S&P 500’s 1.9% advance. STAAC is neutral technology with a positive bias.

Historical Sector Performance After Initial Fed Rate Hikes

* Real estate sector data only includes the most recent three rate-hiking cycles (2004, 2015, 2022). All other sector data goes back to six cycles dating back to 2004.
Source: LPL Research, Bloomberg 09/28/26
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested in directly.

Now for the Laggards

Financials. The first laggard is financials, with a modest 0.8% average gain six months after initial rate hikes but a respectable 9.5% average gain 12 months later – though inflated by the crisis-era surge in 1997-1998. While rising rates theoretically help interest income, allowing banks and insurers to reinvest at higher yields, and increase passive returns on cash deposits, shares historically have been pressured by more restrictive monetary policy given banks’ reliance on loan demand, low funding costs, a steep yield curve, and low credit risk. Rate hikes are intended to slow the economy, and one of the most direct ways this occurs is by curbing borrowing from consumers and businesses through tighter financial conditions.

Among these six rate hiking campaigns since 1994, the worst for financials was the March 2022 cycle when the sector’s 15% loss 12 months after the initial rate hike doubled the loss for the S&P 500. Bank balance sheets came under intense pressure as interest rates surged from extremely low levels in 2022, helping set the stage for the regional bank failures of 2023.

Since the Fed hiked on September 16, financials have lost 2.4% as the S&P 500 has gained 1.9%. STAAC is neutral financials.

Consumer Discretionary. Consumer discretionary is the last underperformer we’ll highlight. This one is less surprising as higher interest rates and inflation causes consumers to pull back on big ticket and “luxury” (non-essential) purchases, weighing on housing, automakers, travel and leisure companies, and some retailers. The struggles of homebuilders from higher mortgage rates can ripple through to durables, home improvement, and home furnishings because fewer families are on the move. Consumer spending also tends to have a negative correlation with rising energy prices, so if energy is on the winners list, the chances are good that you’ll see consumer discretionary among the laggards.

Since the Fed hiked on September 16, the consumer discretionary sector has lost 0.3%, lagging the S&P 500’s 1.9% advance. STAAC is underweight consumer discretionary, due, in part, to high energy prices and broad inflation pressures.

Conclusion

Broadly, the S&P 500 and underlying sectors are likely to experience some volatility as investors digest the start of the Fed’s first tightening campaign in three years. And while past performance is no guarantee of future results, when policymakers raise rates in a strong economy, forward returns have tended to hold up well, particularly in the energy, utilities, and technology sectors. Meanwhile, the consumer discretionary and financials sectors have tended to struggle with the start of a Fed rate hiking campaign.

LPL Research continues to favor the energy sector as a hedge against ongoing uncertainty around shipping disruptions and supply and demand imbalances in crude oil and refined products as negotiations between Washington and Tehran seem to be going nowhere. LPL Research also maintains an overweight stance on industrials to take advantage of the artificial intelligence (AI) buildout and business tax incentives.