The S&P 500 is poised for a potential surge in the year following the end of a rate “top”, according to DataTrek. Markets are betting that the Federal Reserve has finished raising rates, and if that’s the case, the S&P 500 could see a double-digit increase in the next year.
DataTrek analyst Jessica Rabe pointed out that in history, rate “tops” have been followed by strong gains for stocks. Typically, US equities rally by double digits after the Fed stops raising near-term rates, with the only exception occurring after the dot com bubble burst in 2000.
Looking at past rate hike cycles, it is evident that after the end of a rate hike cycle, the S&P 500 experiences significant gains. After the 1995 peak, the S&P 500 jumped 35.2% in the following year. Similarly, in 2006, there was a 20.7% increase in the year after the rate top, and after the 2018 rate hike cycle ended, the benchmark index spiked 27.9% over the next year.
Taking all these instances into account, the average growth in the S&P 500 after a rate top is 17.4%. With the current status of the S&P 500 essentially unchanged since July 26th, the historical data suggests that the index can rally by 17 percent through the first half of 2024.
On Wednesday, the benchmark index was at 4,547, up about 1% in the past 5 days. This follows a cool CPI report last week, and growing conviction in the market that the Fed was done hiking rates. Experts like Jeremy Siegal expect rate cuts to arrive as early as March next year.
Looking at what happens to stocks after the central bank cuts interest rates, Rabe noted that returns can be “mixed” in the months following the cut. While markets usually rally in the month following the cut, in the year after cuts began in 2001 and 2007, the S&P 500 saw losses. However, in 2019, the index was up 8.9% in the year after the rate cut in July.
This difference is largely attributed to unique factors like the 9/11 terror attacks in 2001 or the long-lasting damage from the Financial Crisis in 2008. Rabe pointed out that rapid monetary and fiscal policy responses to the Pandemic Crisis helped US equities recover much quicker.
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