Can the S&P 500 Rally as Treasury Yields Rise?

US stocks have historically struggled when the Federal Reserve begins a cycle of hiking rates. But equities tend to generate gains a year after interest rates start rising, according to Goldman Sachs Research.

The S&P 500 has posted an average three-month decline of 2% at the start of seven hiking cycles over recent decades, Ben Snider, chief US equity strategist, writes in a report. But looking further out, the index has delivered an average 12-month gain of 9%, with positive returns in every episode except 2022.

In addition, much of the increase in rates from a cycle of Fed hikes may already be reflected in yields: Interest-rate markets are already pricing multiple rate increases by the middle of 2027, making it less likely that monetary policy will produce a hawkish surprise for markets.

"The medium-term impact of Fed tightening on equities will depend on how tightening affects earnings growth, which is the most important driver of stocks," Snider writes.

Why have Treasury yields surged?

Ten-year US Treasury yields have risen to about 5%, the highest since 2007. US core consumer price inflation in August was higher than consensus estimates, and our economists now expect the Federal Open Market Committee to raise its policy rate by 25 basis points this week. Goldman Sachs Research’s rate strategists believe that the combination of rising oil prices, a repricing of the Fed path, strong economic growth, and investment in artificial intelligence (AI) has lifted long-term interest rates.

What do higher rates mean for stock valuations?

Equity multiples have declined this year, but valuations relative to bonds have been roughly unchanged. The S&P 500’s forward price-to-earnings ratio has dropped from 22x at the start of 2026 to 19x. While uncertainty around AI returns and questions about the staying power of recent earnings growth have contributed to that decline, rising interest rates have also been part of the story, according to Goldman Sachs Research.

At the same time, the gap between the S&P 500 earnings yield (5.2%) and the real, inflation-adjusted 10-year Treasury yield (2.6%) is around 270 basis points. Outside of brief market selloffs, that spread—a simple proxy for the equity risk premium—has been fairly steady over the past two years, Snider writes.

Which stock market sectors perform best when the Fed hikes rates?

There is no consistent pattern for sector performance when the Fed starts increasing rates. Energy and technology companies have delivered the strongest average returns in the three months following an initial hike, while healthcare has posted the weakest average returns, according to Goldman Sachs Research. No sector has reliably outperformed or underperformed across past episodes of rate hikes.

The sensitivity of US stocks to interest rates, meanwhile, varies widely. The valuations of "long-duration" stocks with high growth rates and low current profits are particularly vulnerable to rising yields. That’s because the cash flows underpinning their present values are concentrated in the distant future, Snider writes. In contrast, financial companies’ earnings and share prices tend to benefit when interest rates rise. Like the broader information technology sector, AI stocks have shown a modest negative correlation with real yields.

Stocks involved in home construction are one of the most sensitive parts of the equity market to long-term interest rates. Housing stocks have traded in lockstep with bond yields during the past few months, underperforming the equal-weighted S&P 500 by 16 percentage points since June.

Why the speed of bond yield moves matters

It is not just the level of interest rates that matters—it is how fast they move, Snider writes. In recent decades, stocks have usually generated positive returns alongside rising interest rates unless the pace of the rate increase was more than two standard deviations above normal. Today, that threshold would equate to an increase in 10-year Treasury yields of roughly 50 basis points over a month or 30 basis points over two weeks.

“The speed of the rate moves during the last few weeks helps explain why stocks struggled to digest those changes,” Snider writes.

Stocks are also more sensitive to long-term rates than to short-term rates. Roughly 75% of the present value of the S&P 500 reflects cash flows 10 years or more in the future, according to Goldman Sachs Research. Mirroring the long-term nature of equity cash flows, S&P 500 returns have the strongest correlation with changes in long-term bond yields.

Are US companies prepared for rising borrowing costs?

Interest rates can affect corporate earnings and solvency as well as equity valuations, but those risks appear limited, Snider says. S&P 500 borrowing costs have increased during the last few years alongside higher bond yields, but the increase has been modest because most S&P 500 company debt carries fixed rates and long maturities. In addition, interest expenses remain small relative to strong profits. Smaller companies generally have weaker balance sheets and higher shares of floating-rate debt, making them more vulnerable to changes in interest rates.

A company can maintain its valuation as interest rates rise if investors see it as less risky (a lower equity risk premium) or expect it to grow faster, according to Goldman Sachs Research. To fully offset the impact of a 1 percentage point increase in the cost of equity from today's levels, a company's expected long-term growth would need to increase by 2 percentage points. One way to boost growth is through investment in capital expenditures and research and development. Mergers and acquisitions, as well as spinoffs, are also among the ways for companies to improve their outlook for growth.

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