Goldman Sachs: Can the S&P 500 Keep Rising After the Fed Hikes Rates?

TL;DR
·Goldman Sachs analyzed the past seven Fed rate hike cycles and found that the S&P 500 fell an average of about 2% in the three months after the first hike, but rose an average of 9% after 12 months, with positive returns in all cycles except 2022.
·This year, the S&P 500's forward P/E ratio has dropped from 22x to 19x, but the equity valuation premium relative to bonds has not deteriorated significantly further, suggesting that some of the impact of higher rates has already been priced in.
·Goldman Sachs believes that what U.S. stocks really need to watch is not just "high rates," but how fast long-term bond yields rise. Currently, this roughly corresponds to a 50bp rise in the 10-year Treasury yield over one month, or a 30bp rise over two weeks.
·High-valuation, low-current-profit "long-duration" growth stocks are most sensitive to rates; homebuilding stocks are also under pressure. Financial stocks, on the other hand, tend to benefit more from rising rates.
·For large companies, short-term financing pressure remains relatively manageable because most debt is fixed-rate with longer maturities. Ultimately, what determines the medium-term performance of stocks is whether earnings growth can offset valuation compression.

A Fed rate hike seems imminent, but for U.S. stocks, the "hike" itself may not be the most important issue.

Goldman Sachs' chief U.S. equity strategist Ben Snider pointed out in his latest report that, based on historical experience, after the Fed starts a rate hike cycle, U.S. stocks often experience a period of adjustment first, but if the observation period is extended to one year, the outcome is usually positive.

In the seven rate hike cycles over the past few decades, the S&P 500 fell an average of about 2% in the three months after the first hike; but the average return after 12 months reached 9%, with positive returns in all cycles except 2022. At the same time, the interest rate market has already priced in expectations of multiple rate hikes through mid-2027, so if the Fed's final policy path does not significantly exceed current pricing, the room for further "hawkish surprises" may have diminished.

Snider believes this means that what really determines the medium-term performance of U.S. stocks is not the first rate hike itself, but how the tightening policy ultimately affects corporate earnings growth.

Valuations have already fallen, but stocks haven't suddenly become more expensive than bonds

This year, U.S. stock valuations have actually experienced a significant compression.

The S&P 500's forward 12-month P/E ratio has dropped from about 22x at the beginning of 2026 to 19x. Goldman Sachs believes this is driven by market doubts about the return on AI investment, concerns about whether recent high earnings growth can be sustained, and rising interest rates as an important factor.

The 10-year Treasury yield has now risen to about 5%, the highest level since 2007. Goldman Sachs' rates strategists believe that rising oil prices, repricing of the Fed's policy path, a strong U.S. economy, and continued expansion of AI-related capital spending have jointly pushed long-term rates higher.

However, looking at the relative valuation of stocks versus bonds, the situation has not deteriorated significantly.

The S&P 500's earnings yield is currently about 5.2%, and the real 10-year Treasury yield is about 2.6%, leaving a gap of about 270 basis points. Goldman Sachs views this as a simple equity risk premium indicator. Except for periods of sharp market declines, this spread has remained largely stable over the past two years.

In other words, the absolute valuation of U.S. stocks is declining as rates rise, but relative to bonds, there is no obvious new round of valuation imbalance.

More important than the "5% Treasury yield" is how fast it rises

Goldman Sachs particularly emphasizes that what affects the stock market is not just the level of interest rates, but also the speed of rate increases.

Historically, as long as the pace of rate increases remains within a relatively normal range, U.S. stocks can usually coexist with rising rates. What really tends to cause market stress is a rapid jump in bond yields over a short period.

According to Goldman Sachs' current estimates, if the 10-year Treasury yield rises by about 50 basis points in one month, or about 30 basis points in two weeks, that roughly equates to exceeding two standard deviations of historical normal volatility. The recent difficulty U.S. stocks have had digesting bond market changes is largely because yields have risen too quickly.

Moreover, compared with short-term policy rates, U.S. stocks are more sensitive to long-term rates.

Goldman Sachs estimates that about 75% of the S&P 500's present value comes from cash flows 10 years or more into the future. Therefore, when long-term risk-free rates such as the 10-year and 30-year rise, the value of future cash flows discounted back to today decreases, directly depressing stock valuations.

This also explains why some "long-duration stocks" are particularly vulnerable—for example, growth companies with low current profits but high market expectations for future growth, whose value comes more from earnings far in the future. Once the discount rate rises, the impact on their valuations is more pronounced.

AI stocks and the overall tech sector currently show a moderate negative correlation with real rates. Another more obvious sensitive sector is homebuilding: over the past few months, homebuilding stocks have moved almost inversely with bond yields, and have underperformed the equal-weight S&P 500 by about 16 percentage points since June.

In contrast, financial companies' earnings often have a better chance to benefit from a higher rate environment.

However, Goldman Sachs also cautions that historically there is no stable "rate hike winner sector." In the three months after the start of past rate hike cycles, energy and tech stocks performed best on average, and healthcare performed worst, but no sector has consistently outperformed or underperformed across all rate hike cycles.

Will rate hikes eventually hit corporate earnings?

Another key question is whether corporate profits will start to be significantly eroded as financing costs rise.

Goldman Sachs believes that for large S&P 500 companies, short-term risks remain relatively limited.

Although bond yields have continued to rise over the past few years, the actual borrowing costs of S&P 500 companies have also increased, but the magnitude is not particularly large. An important reason is that most existing debt of large companies is fixed-rate with longer maturities, so rising market rates do not immediately pass through to corporate interest expenses.

At the same time, with profit levels still relatively high, interest expenses as a share of corporate earnings remain small. In contrast, small companies typically have weaker balance sheets and a higher proportion of floating-rate debt, making them more sensitive to rising rates.

This is why Goldman Sachs ultimately brings the question back to growth.

When rising rates increase the cost of equity capital, if a company wants to maintain its original valuation, it either needs to convince investors that its risk has decreased, thereby accepting a lower risk premium, or it must prove that future growth will be faster.

Goldman Sachs estimates that if the cost of equity capital rises by 1 percentage point, the company's long-term expected growth rate needs to increase by about 2 percentage points to fully offset this valuation pressure.

Therefore, in a high-rate environment, capital spending, R&D investment, M&A, and even business spin-offs may become more important: they are not just tools for corporate expansion, but also ways for companies to try to hedge higher discount rates with higher growth.

From this perspective, the real test of this round of Fed rate hikes for U.S. stocks may not be the 25 basis points themselves.

If long-term bond yields rise only moderately, and the economy and corporate earnings continue to grow, historical experience suggests that U.S. stocks may not be unable to digest higher rates; but if long-term rates continue to jump rapidly, and corporate earnings expectations begin to be revised downward, then the dual pressure of "valuation compression + weakening earnings" could become a greater risk.

Therefore, after this week's FOMC meeting, in addition to watching whether the Fed continues to signal rate hikes, the market should also pay attention to three variables: the 10-year Treasury yield and its pace of increase, corporate earnings expectations, and whether AI capital spending can continue to translate into actual growth.