Is a September rate hike necessarily bearish? Analysis: The initial hike resulted in limited declines for U.S. stocks, and returns a year later outperformed the norm.

Market concerns about a potential Federal Reserve rate hike in September may overestimate the actual impact of tightening on U.S. equities.

According to MarketWatch analysis, historical data shows that the first rate hike after the Federal Reserve ends its easing cycle usually only causes short-term disturbances. The S&P 500 Index typically experiences about a month of weakness around the first rate hike, but then gradually stabilizes; on average, it posts positive returns three months after the hike, and the 12-month average return is even higher than long-term market performance.

Currently, the market broadly expects the Federal Reserve to raise interest rates at the meeting on September 15-16, and this expectation has already been partially priced into recent stock market movements. However, based on historical trends, what the market truly needs to watch out for may not be the rate hike itself, but the economic signals behind it.

If a rate hike happens when the economy remains resilient and corporate profits are still growing, the valuation pressure from rising interest rates is unlikely to reverse the stock market trend. Therefore, even if the Federal Reserve hikes rates in September as expected, it does not necessarily mean U.S. stocks will enter a prolonged downward phase.

The direction of interest rates is not the key—economic signals matter more

The reason why the first rate hike may not put sustained pressure on equities is tied to the economic environment at the time.

Restarting rate hikes by the Federal Reserve usually means the economy still possesses a certain degree of resilience, or risks from inflation and economic overheating are rising. In other words, rate hikes often occur at a stage when the economy can still withstand higher interest rates. As long as economic growth and corporate earnings do not deteriorate significantly at the same time, the rising financing costs and valuation pressures brought by a hike are unlikely to reverse stock market trends.

In contrast, the signal released by the first rate cut is far more complex. While a rate cut can lower financing costs and improve liquidity, it also often indicates that economic growth has slowed considerably, or is facing recession risks. In this scenario, any valuation support from easing may be offset by worsening corporate earnings expectations.

Historical data also shows that the S&P 500 Index’s average return following the first rate cut is lower than after the first rate hike. However, the statistical difference between the two is not significant at the 95% confidence level, so it is insufficient as a clear timing signal.

Ultimately, what determines stock market performance is not the single variable of “rate hike or rate cut,” but the economic fundamentals behind changes in interest rates. If a hike occurs when the economy remains resilient, investors need not be overly pessimistic; conversely, if a rate cut is implemented to handle rapid economic weakness, lower rates may not necessarily bode well for the stock market.