What happens to stocks when the Fed starts hiking? Barclays weighs in
Investing.com – U.S. stock markets heading into a potential monetary tightening cycle can take comfort in history. The S&P 500 has consistently delivered gains during past Federal Reserve rate hike cycles, according to a report by Barclays.
As financial markets increasingly price in between one and two Federal Reserve interest rate hikes by the end of 2026, Barclays strategists examined equity performance across every tightening cycle since the 1990s.
The findings show that the S&P 500 generated positive annualized returns in every single cycle – measured from the first rate hike to the last – ranging from 0.1% to 7.8%, with a median gain of 5.6%.
“The positive performance in equities during these hiking cycles is not surprising, given these hikes mostly occur in healthy growth environments,” wrote Barclays strategists led by Venu Krishna.
However, the bank cautioned that investor perception plays a critical role. During the Fed’s 2022-2023 inflation battle, market dynamics diverged from the norm.
Defensive sectors like real estate, utilities, and financials saw heavy sell-offs, whereas Tech and Energy surged, underscoring that performance heavily depends on whether the market views the central bank as “ahead or behind the curve.”
Tech and energy lead, but volatility looming
Historically, Technology and energy have posted the strongest median annualized returns during rate hike cycles at 14% and 8.8%, respectively.
Despite their top-tier median gains, both sectors demonstrated significant performance dispersion. In their worst-performing cycles, Tech and energy logged annualized declines of 1.5% and 2%, respectively.
Software equity focus
As part of its strategy update, Barclays highlighted its rebalanced Resilient Software Basket, designed to identify technology equities positioned to navigate shifting market conditions:
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Palantir Technologies: Weight 10% | Z-Score: 1.05
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Datadog: Weight 10% | Z-Score: 0.92
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Adobe: Weight 10% | Z-Score: 0.62
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Intuit: Weight 10% | Z-Score: 0.50
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Salesforce: Weight 10% | Z-Score: 0.21
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Fortinet: Weight 8.99% | Z-Score: 0.41
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Cadence Design Systems: Weight 9% | Z-Score: 0.31
Other top holdings in the 20-stock long basket include Zscaler (6.38% weight), Autodesk (5.87%), and Fair Isaac Corp (3.9%).
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