Goldman Sachs sees one more Fed hike as stocks may benefit

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Goldman: Fed hike may aid stocks

Highlights

Goldman Sachs expects only one more Fed rate hike versus the market's expectation of three, making this among the smallest tightening cycles since 1983.
If the Fed raises rates three more times, the target rate will climb about 100 basis points; a single hike results in just 50 basis points total tightening.
Historically, modest rate-hiking cycles like 1997 and 2015 saw the S&P 500 rise 34% and 9% respectively in the 12 months following the initial hike.

Rate outlook and historical comparisons

As reported by CNBC, Goldman Sachs macro strategist Vickie Chang says the market is pricing in just three more rate increases from the Federal Reserve, while the bank's economists largely expect only one additional hike.

Chang says either outcome would rank among the smallest Fed rate-hiking cycles since 1983. She points to prior periods including a 25-basis-point increase in March 1997, another 25-basis-point hike in December 2015, and a total of 175 basis points between June 1999 and May 2000.

She notes that if the central bank raises rates by a quarter-point three more times, the Fed's target rate would rise by about 100 basis points from where this cycle began. If there is only one more increase, total tightening would amount to just 50 basis points.

Potential implications for equity markets

Chang says relatively small policy tightening has historically coincided with favorable outcomes for stocks. In a note to clients, she says the 1997 and 2015 one-hike cycles are the closest comparisons to Goldman's own expectations for the current cycle in terms of cumulative tightening.

She says equities initially fell in both episodes, but bottomed quickly in 1997 and then rallied strongly. In 2015, stocks reached a trough within two months of the first hike, although the recovery to pre-hike levels took longer and trading remained more rangebound than in 1997.

The S&P 500 rose 34% in the year after the 1997 increase and gained about 9% in the 12 months following the 2015 hike. The benchmark also advanced 9% during the June 1999 to May 2000 period.

Chang adds that the broader macro backdrop of a hiking cycle during an ongoing investment boom shares some features with 1999, though the imbalances seen then are generally less visible now. She also says the market still expects a more extended series of hikes than in 1997 and 2015, even if that path remains short of the 175 basis points delivered in 1999.

In our earlier coverage of the S&P 500’s push toward 8,000, we noted that the index’s rally was being tested by a tougher macro mix—higher oil prices, elevated Treasury yields, and political uncertainty—alongside a high bar for third-quarter earnings. The piece also flagged concentration and breadth risks, with gains driven largely by a handful of AI-linked megacaps even as many index components traded below key moving averages.

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