Société Générale Offers "Hawkish Forecast + Bull Market Remedy": The Fed Will Raise Rates Three Times, but Historical Trends Suggest "Buy the Dip" for U.S. Stocks

According to Zhitong Finance APP, following a hawkish speech by Federal Reserve Chair Kevin Walsh at the Jackson Hole Global Central Banking Annual Meeting, Société Générale has officially raised its forecast for the Fed's rate path, becoming one of the most aggressive investment banks on Wall Street. As the countdown to the September FOMC meeting begins, Société Générale expects the Fed to raise rates three times—in September, December, and March 2027—by 25 basis points each. However, Manish Kabra, head of U.S. equity strategy at Société Générale, offered a "bull market antidote" to this hawkish outlook: historically, investors should buy into any stock market weakness triggered by Fed rate hikes.

Stubborn Inflation: Three Major Drivers Behind SocGen's Shift to Hiking

The bank detailed in its report three core factors that prompted it to shift from “pausing rate hikes” to “supporting rate hikes.”

First, core inflation remains above pre-pandemic levels. Core Personal Consumption Expenditure (PCE) inflation—especially in services—has yet to return to its pre-pandemic lows, and remains structurally elevated.

Second, oil price and tariff shocks overlapping. The Iran war has pushed oil prices back above $90 per barrel, and combined with the Trump administration's new round of tariff policies, this has further driven price increases.

Third, Walsh’s hawkish remarks at Jackson Hole. The bank emphasized that Walsh “acknowledged growing concerns about persistently high inflation” in his speech, marking a shift in Fed policy from “maintaining a pause in rate hikes” to “reprioritizing tightening.”

The CME FedWatch tool shows that markets are currently pricing in about a 60% chance of a rate hike in September, with two hikes by December being the most likely outcome. Market expectations have thus somewhat resonated with Société Générale’s hawkish stance.

Strategists wrote in the report: “Given that underlying inflation persists and the Fed's concerns over high inflation are becoming increasingly evident, the need to maintain an unchanged rate path is diminishing. Now is the time to shift towards expecting further rate hikes.”

S&P 500 Has Seen Valuation Compressions but Not Fully Priced In; Yet History Suggests a Buying Opportunity

Facing the coming hiking cycle, Société Générale chief U.S. equity strategist Manish Kabra gave a seemingly paradoxical but crucial assessment: investors should not panic, but rather view any equity market weakness triggered by rate hikes as a buying opportunity.

Kabra’s core argument is based on two key data points. First, the S&P 500 has already “priced in a discount” of about 15%—its expected P/E ratio has dropped from 23.5 to about 19.5. This means the market has partially digested the risks of the Fed resuming rate hikes. However, Kabra also warned that stocks have yet to fully reflect the overall impact of a “new rate-hiking cycle.”

Historical Pattern: Average 3% Drop in the First Month, 4% Gain in Six Months

Kabra’s analysis of historical data offers investors a clear timeframe: within the first month after an initial rate hike, the S&P 500 averages a 3% drop; six months after the first rate hike, the index rebounds by an average of 4%.

From the initial hike to the final hike in a cycle, the S&P 500 has recorded positive annualized returns during every complete tightening period—ranging from 0.1% to 7.8%—with a median gain of 5.6%.

Kabra stated: “After the Fed resumes tightening, the equity market often remains weak for 1 to 3 months, but six months later, the market tends to be back at new highs.”

Yield Curve Inversion: The “Key Signal” That Determines Success or Failure

Kabra emphasized there is a crucial exception to the historical trend: when the 2-year U.S. Treasury yield exceeds the 10-year yield—i.e., when the yield curve inverts—historically, the equity market has seen drawdowns of about 20%.

Société Générale’s core view is that in most scenarios, a yield curve inversion will not occur. As long as this premise holds, “no curve inversion = buy into mid-cycle rate hikes.” Kabra summarized this in the report as “the curve rules”—the key indicator of whether policy is “tightening” is the yield curve’s shape, not valuation itself.

2022’s “Exception”: When Tightening Came Too Fast

Kabra specifically noted that 2022 was an exception—at that time, the Fed tightened extremely aggressively in a short period, the market was unable to digest such large-scale tightening, and the yield curve inverted, causing equities to fail to recover as expected within six months.

However, Société Générale expects that in most cases, a yield curve inversion will not occur in this tightening cycle. This means the strategy “no inversion = buy into hikes” still stands in the current cycle.

Société Générale believes the current scenario is fundamentally different from 2022: the Fed is taking a “cautious tightening strategy,” raising rates three times over six months in a gradual manner, which allows policymakers to monitor the impact of rate hikes on economic activity.

Kabra’s core view can be summarized in one sentence: do not panic because of Fed rate hikes; instead, build positions when the market dips on rate hike expectations. Data shows that the 1 to 3 months following the start of a hiking cycle are a “digestion period,” but also represent the best buying window. As long as the yield curve remains normal, six months later, the market is highly likely to hit new highs.