Can Stocks Absorb a Fed Hike Cycle? | Presented by CME Group

The last time the Federal Reserve began an aggressive hiking cycle was back in 2022, and the S&P 500 responded by falling almost 20% in the following months. Now, it's 4 years later, and the Fed has begun a new hiking cycle that futures markets predict will continue well into 2027 with 3 to four more 25 basis point hikes priced in. Question is, can stocks continue climbing into a tightening Fed? Well, there are reasons to think this time could be different. In 2022, the Fed was playing catch-up, raising rates rapidly after allowing inflation to become deeply entrenched. Today, that situation is different. The economy remains relatively strong, and enormous investment in artificial intelligence is helping to drive growth. If corporate earnings continue to expand, stocks just may be able to absorb higher interest rates. But there's another side to this. Higher rates mean more competition for investment dollars and ultimately tend to pressure stock valuations. And if the Fed is raising rates because inflation refuses to come down, those higher rates could eventually slow economic growth. The real question is whether the economy can sustain higher interest rates if the investment spending that's been driving so much of the growth continues. In 2022, the market had to contend with rapidly rising rates and falling valuations. This time, strong earnings and productivity gains could provide a cushion. But if tightening begins to undermine growth, that cushion could disappear quickly. The difference between the two periods may ultimately come down to one thing, whether economic growth can outrun the cost of money.