Investors often assume that rising interest rates are usually bad for equities. Higher borrowing costs should slow economic growth, reduce corporate profits, compress valuations and hurt stock prices.
Yet history tells a slightly different story.
Since 1990, the S&P 500 has frequently delivered positive returns during Federal Reserve tightening cycles. Stock markets are ultimately driven more by earnings growth and economic conditions than by interest rates alone.
The key question for investors is not whether the Federal Reserve is raising rates. The more important question is whether the economy and corporate earnings can continue expanding despite higher rates.
What History Shows
Since 1990, the Federal Reserve has gone through five major hiking cycles. During most of those periods, the S&P 500 still generated positive returns.
Fed Hiking Cycle
The historical evidence challenges the simplistic narrative that “higher rates equal lower stocks”.
In fact, the Federal Reserve usually raises rates because economic conditions are strong. Employment is healthy. Consumers are spending. Businesses are investing. Corporate earnings are growing. Inflation pressures emerge precisely because demand remains robust.
In other words, rate hikes often occur during periods of economic strength rather than weakness.
This explains why equities can continue rising during tightening cycles. Earnings growth can offset the negative effects of higher interest rates.
The 2004–2006 cycle is particularly instructive. The Federal Reserve raised rates 17 consecutive times, taking the Fed funds rate from 1% to 5.25%. Despite this, the S&P 500 still advanced about 12% during the hiking cycle. The economy continued expanding, corporate profits remained healthy and financial conditions initially stayed supportive.
Similarly, during the 2015–2018 tightening cycle, the Federal Reserve gradually raised rates while the US economy benefited from improving global growth, strong labour markets and corporate tax cuts. Equities delivered strong gains during most of the cycle.
Even the recent 2022–2023 tightening cycle (one of the fastest in modern history) did not permanently derail equities. While markets suffered a sharp valuation correction in 2022 as inflation surged and bond yields rose, the market later recovered as earnings proved more resilient than feared, particularly within large technology companies benefiting from artificial intelligence investment spending.
The Real Risk Is Usually Not The Rate Hikes Themselves
History also shows that the greater danger often emerges after the Federal Reserve stops hiking.
This may sound counterintuitive. Investors frequently celebrate when the Fed pauses rate increases. Yet some of the most severe bear markets began after the final hike had already occurred.
Fed Hold Period
The lesson is important. A Fed pause does not guarantee safety. What matters is whether economic imbalances are building beneath the surface.
In 2000, the Fed stopped hiking, but the technology bubble was already unsustainable. Corporate earnings expectations became unrealistic and valuations collapsed.
In 2007, the Fed had already paused, but excessive leverage within the housing and banking systems eventually triggered the Global Financial Crisis.
By contrast, the 1995 and 2019 pauses produced strong equity rallies because the economy avoided recession and earnings remained resilient.
What Investors Should Focus On Instead
For long-term investors, interest rates should be viewed within a broader framework rather than in isolation.
Three factors matter more than the absolute level of rates:
First, corporate earnings. As long as earnings continue growing, equities can often absorb higher rates.
Second, economic momentum. Rising rates become dangerous primarily when they push the economy into recession or trigger financial instability. It is the last rate hike that matters, not the first.
Third, valuations. Higher interest rates are more problematic when markets are already trading at extreme valuations disconnected from underlying fundamentals.
Today’s environment remains unusual. Interest rates are restrictive compared to the past decade, yet nominal economic growth remains positive, labour markets are relatively resilient and large technology firms continue benefiting from substantial AI-related investment spending.
This does not mean risks are absent. Elevated valuations, fiscal deficits and geopolitical uncertainties still matter. However, history suggests investors should avoid assuming that rising rates alone are sufficient to end a bull market.
Markets are far more sensitive to collapsing earnings and recession risks than to the mere existence of higher interest rates.
For investors, the key takeaway is simple: do not fear rising interest rates in isolation. Focus instead on whether earnings remain resilient, whether economic growth continues and whether excesses are building beneath the surface. Those factors have historically mattered far more for long-term equity returns.