As market expectations for the Federal Reserve to begin hiking rates in early 2027 continue to build, new research from Barclays shows that once a rate-hike cycle gets underway, U.S. equities will face significant pullback pressure overall\u2014but energy is the only sector that has delivered positive returns in the quarter following the first hike across the past five tightening cycles.<\/p>\n
In a report published August 24, Barclays strategists Venu Krishna, Riddhiman Dass, and colleagues systematically reviewed equity market performance patterns across five rate-hike cycles since 1994. The data show that in the quarter following the first hike, the S&P 500 posted a median decline of 3.9%, the Russell 2000 small-cap index fell by a median 7.2%, and financials were the worst performer with a median drop of 8.4%. On the style front, value stocks outperformed growth, and large caps significantly led small caps.<\/p>\n
Long-end yield dislocation pulls rate-hike expectations forward<\/p>\n
The U.S. rates market has recently exhibited unusual moves. Despite nonfarm payrolls, inflation, and retail sales data consistently coming in below expectations, long-end yields have climbed rapidly, with 30-year Treasury auction yields touching their highest level since 2001. The U.S. Treasury Department has already begun intervening in the bond market to manage rising rates, though the intervention itself has raised concerns about potential side effects.<\/p>\n
Barclays rates strategists note that the primary drivers of this long-end yield surge are large-scale, long-duration bond issuance by AI-related companies, as well as an investor base that has become increasingly price-sensitive. Meanwhile, the short end of the curve is also showing signs of pressure.<\/p>\n
In terms of market pricing, the implied policy rate path has shifted markedly in a hawkish direction, with markets gradually pricing in a hike at the January 2027 FOMC meeting. However, Barclays economists’ base case remains that the pass-through from CPI, PPI, and import price data to core PCE is sufficiently benign that the Fed will stay on hold through the first half of 2027\u2014though they acknowledge that the structural shift in market expectations warrants close attention.<\/p>\n
A historical sample of five cycles<\/p>\n
The five rate-hike cycles covered in the study are: February 1994 to February 1995, June 1999 to May 2000, June 2004 to June 2006, December 2015 to December 2018, and March 2022 to July 2023. The macro backdrops of these cycles varied significantly\u2014some were driven by strong real-economy growth, while others were primarily aimed at curbing inflation.<\/p>\n
The research finds that the start of a hiking cycle marks a clear inflection point in equity market leadership. In the quarter before the first hike, the S&P 500 posted a median gain of 2.2%, with energy and industrials leading the way at median gains above 7.5%, while communication services fell roughly 2%.<\/p>\n
Once the hike landed, market leadership reversed swiftly. Beyond financials posting the deepest decline, traditional defensive sectors such as healthcare, utilities, and consumer staples also ranked among the biggest losers. Industrials, materials, and consumer discretionary saw sizable pullbacks as well, though their declines were less severe than those of defensive sectors; technology and communication services posted relatively modest declines and outperformed the broader market.<\/p>\n
SectorMedian performance in quarter after first hikeEnergy+0.3%TechnologyOutperformed (modest decline)Communication ServicesOutperformed (modest decline)IndustrialsSizable pullbackMaterialsSizable pullbackConsumer DiscretionarySizable pullbackHealthcareAmong biggest losersUtilitiesAmong biggest losersConsumer StaplesAmong biggest losersFinancials-8.4% (worst)<\/p>\n
Note: Data based on Barclays’ analysis of five rate-hike cycles from 1994\u20132023. Median S&P 500 decline was 3.9%; median Russell 2000 small-cap decline was 7.2%.<\/p>\n
Why energy stands alone<\/p>\n
Energy was the only sector to deliver positive returns in the quarter following the first hike, with a median gain of 0.3%, and it consistently outperformed the S&P 500 across all five cycles. This performance is highly consistent with the pattern over full hiking cycles\u2014across the five complete historical cycles, energy’s median annualized performance also ranked at or near the top of all sectors.<\/p>\n
Barclays strategists point out that rate-hike cycles typically begin in the late stage of an economic expansion, when growth still retains resilience. In this environment, the energy sector benefits from support from commodity prices and from markets pricing in robust real-economy demand.<\/p>\n
By contrast, the negative reaction of financials to the start of a hiking cycle has its own internal logic: the banking industry depends on healthy credit demand, low funding costs, and manageable credit risk. The tightening of financial conditions and the flattening of the yield curve that accompany rate hikes both compress bank net interest margins. The struggles of defensive sectors are also well-founded\u2014in the late stage of an expansion when economic activity remains strong, the Fed’s tightening signal means the valuation premium that markets assign to stable cash flows and steady earnings will come under compression.<\/p>\n
Style rotation: value takes the baton from growth<\/p>\n
On the style-factor front, the start of a rate-hike cycle also triggers a clear rotation effect. The Fama-French small-cap-minus-large-cap factor weakened persistently in the first two months after the initial hike, before entering an extended recovery phase. The momentum factor was strong in the weeks leading up to the hike but became choppy once the hike landed.<\/p>\n
The value-versus-growth rotation was evident in the two quarters following the first hike. In large caps, it manifested as a gradual trend of growth underperforming value; in small caps, growth’s disadvantage relative to value emerged rapidly within two months of the hike, with a more violent reversal.<\/p>\n
Barclays strategists caution that all of the above conclusions are based on a historical sample of five rate-hike cycles, which is relatively limited, and past performance is not indicative of future returns. That said, in terms of consistency, the patterns of energy outperforming, financials and defensive sectors remaining under pressure, and growth underperforming value have all shown strong repeatability across the five cycles and carry meaningful reference value.<\/p>\n","protected":false},"excerpt":{"rendered":"As market expectations for the Federal Reserve to begin hiking rates in early 2027 continue to build, new…\n","protected":false},"author":2,"featured_media":109871,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":"","_share_on_mastodon":"0"},"categories":[21264],"tags":[45399,3343,20783,33514,25788,45398,45396,2699,42748,45397],"class_list":["post-109870","post","type-post","status-publish","format-standard","has-post-thumbnail","category-barclays","tag-30-year-treasury-bond","tag-barclays","tag-energy-stocks","tag-federal-reserve","tag-financial-stocks","tag-riddhiman-dass","tag-russell-2000-index","tag-sp-500","tag-u-s-treasury-department","tag-venu-krishna"],"share_on_mastodon":{"url":"https:\/\/pubeurope.com\/@UnitedKingdom\/117150567879282743","error":""},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/posts\/109870","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/comments?post=109870"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/posts\/109870\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/media\/109871"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/media?parent=109870"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/categories?post=109870"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/tags?post=109870"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}