History shows that stock prices rise, even as the Federal Reserve begins a new cycle of tighter monetary policy.
But there’s much more to this story.
“The lesson from the past seven tightening cycles is that equities may wobble when the Fed raises rates, but quickly recoup losses,” HSBC’s Ben Laidler wrote. “The key to this positive historical performance is earnings growth. Valuation multiples typically contract as the Fed tightens.”
Without earnings growth, contracting valuations — as measured by the price-to-earnings (PE) ratio — mean stock prices will have to fall.
