Editor's Note: On September 16, the Federal Reserve raised the target range for the federal funds rate by 25 basis points to 3.75%-4.00%, a significant step after this policy cycle shifted back toward rate hikes. A few days later, U.S. tech stocks quickly recovered their losses, and the Nasdaq Composite Index hit a fresh record high on September 22. A seemingly contradictory combination thus emerged: monetary policy is tightening, yet the stock market is simultaneously reaching record highs.

The most intuitive takeaway for the market is that rate hikes mean valuation pressure, while record highs mean upside room is shrinking. But Phil Rosen, writing in Opening Bell Daily, offers another interpretation: neither rate hikes nor record highs can be interpreted in isolation from the prevailing economic environment.

Citing historical data, he points out that since 1982, the S&P 500's average return in the 12 months following Fed rate hikes has actually been higher than after rate cuts; and over a longer time horizon, buying stocks near record highs has not performed notably worse than on other trading days.

This set of data does not mean that "rate hikes are bullish for U.S. stocks," nor can it prove that the current market will necessarily continue to rise. What it truly challenges is another, simpler trading logic: "Fed rate hike" or "index hits record high" alone is not sufficient reason to be bearish on the market. What really needs to be assessed is why the Fed is raising rates now, and whether the earnings and economic conditions supporting the stock market rally still exist.

The following is a translation of the original article:

The Fed just raised rates, and U.S. stocks have once again climbed to record highs.

On September 16, the Federal Reserve raised the target range for the federal funds rate by 25 basis points to 3.75%-4.00%. In its statement, the FOMC said U.S. economic activity continues to expand at a "moderate pace," with household spending remaining resilient, capital investment strong, and inflation still elevated.

Less than a week later, the U.S. tech sector regained strength. On September 22, the Nasdaq Composite Index set a new record. Reuters that day linked the rebound to multiple factors including strength in tech stocks, renewed momentum in the AI trade, and falling oil prices.

On the surface, "rate hikes + record highs" appear to be two signals that warrant caution: higher rates could compress equity valuations, while an index already at record levels can easily trigger investor concerns that it has "risen too much."

But historical data does not support such a simplistic conclusion.

Rate hikes are not a "bearish button": average returns are actually higher one year after a hike

Citing data compiled by Charlie Bilello, chief market strategist at Creative Planning, Opening Bell reported that since 1982, the S&P 500 has risen an average of 14.9% in the 12 months following a Federal Reserve rate hike, compared with an average gain of 11.2% in the 12 months after a rate cut.

This result runs counter to the most common market intuition.

Under simple asset-pricing logic, lower rates mean lower financing costs and a lower discount rate for future cash flows, which in theory should be more favorable for stocks; rate hikes are the opposite. But Rosen argues that looking only at the policy action itself ignores a more important question: why is the Fed hiking or cutting rates at this particular point in time?

Generally speaking, if the Fed is able to raise rates, it often means the economy still has at least some capacity to absorb them. Corporate earnings, employment and consumption may still be resilient, giving the Fed room to suppress inflation through higher rates.

Rate cuts, by contrast, often occur in a different macroeconomic environment: slowing growth, a deteriorating job market, stress in the financial system, or rising recession risk.

Therefore, Rosen's core judgment is not that "rate hikes drove the stock market higher," but rather that monetary policy itself is endogenous. Interest rate decisions not only affect the future economy, but also reflect the state the economy is already in.

In other words, if you ignore the economic cycle and simply equate "rate hikes" with "bearish for stocks," it is easy to get the causality backwards.

What really matters is not the direction of interest rates, but the economic conditions behind a rate hike

This logic is especially important in the current environment.

The economic description the Federal Reserve gave when it raised rates this time was not weak. The official statement said the U.S. economy is still expanding steadily, domestic spending remains resilient, productivity growth is strong, capital investment is solid, and employment growth is broadly matching labor supply; at the same time, inflation remains above the policy target.

This means that, at least judging from the Fed's current policy assessment, this rate hike is not further tightening when the economy is already clearly in recession, but rather continuing to address inflation against the backdrop of still-resilient growth.

This is also why simply seeing the words "Fed rate hike" is not enough to directly infer the stock market's next direction.

The truly important question is: as interest rates remain elevated, can corporate earnings, household consumption, and employment continue to absorb tighter financial conditions?

If they can, then the rate hike itself may not be enough to end the upward trend; if high rates ultimately clearly drag down demand and earnings, then the explanatory power of historical average returns for the current market will also decline.

A new high is not a sell signal either, and historical data even has a slight edge

Similar logic also applies to another common concern: "It is already at a record high, can I still buy?"

Citing FactSet data, Opening Bell said that since 1950, buying when the S&P 500 hit a record high produced an average return of about 9.5% over the following 12 months; by comparison, buying on other trading days produced an average one-year return of about 9.3%.

Independent data also show similar conclusions. Statistics based on FactSet and Morningstar Direct data by Vanguard show that, as of September 2025, the average return one year after buying the S&P index at a record high was also 9.5%, while on other trading days it was about 9.2%; over three-year and five-year horizons, the average cumulative return after buying at a record high also did not lag noticeably. The two sets of data differ by 0.1 percentage point in the specific values for "other trading days," which may be related to the sample cutoff date and data processing methods, but the overall direction is consistent.

What truly deserves attention here is not that a record high delivers a few tenths of a percentage point more in returns than an ordinary trading day, but rather that: record highs themselves have not demonstrated a stable negative predictive power.

Rosen's explanation is that market records tend to occur in clusters. A sustained bull market may repeatedly set new highs, and the first, fifth, or even tenth record high cannot alone tell investors when the bull market will end.

Therefore, "prices are already high" and "prices will soon fall" are not the same judgment. More precisely, historical data can only show that the index is at a historical high, which alone is not sufficient evidence that future returns will deteriorate.

Rate hikes plus record highs—what really matters next?

From this framework, what is most worth watching in the current U.S. stock market is not the two static facts that "the Fed has already raised rates" or "the Nasdaq has already hit a record high," but whether the macroeconomic conditions supporting them will change.

On one hand, it is necessary to continue observing whether U.S. corporate earnings, consumption, and employment can remain resilient. If the real economy can still withstand higher rates, then the historical explanation that "rate hikes occur during a relatively strong economic phase" still holds.

On the other hand, it is necessary to observe whether tightening policy is beginning to produce more pronounced lagged effects. If rate-sensitive sectors such as housing and autos weaken further and gradually transmit to consumption, employment, and corporate profits, then the meaning of this rate hike will change.

Historical average data also needs to be used cautiously. Different rate hike cycles since 1982 have differed in inflation levels, valuations, earnings environments, and financial conditions; the average returns after buying at historical highs in the past cannot directly lead to the conclusion that similar returns will necessarily be achieved over the next 12 months.

Therefore, this set of data is better suited to ruling out an overly simplistic judgment rather than providing a new deterministic trading signal: rate hikes do not inherently mean U.S. stocks should fall, and record highs do not inherently mean the rally is over.

What determines the market's direction in the next phase is still the more fundamental question—whether the economy and earnings can continue to support current prices.

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