Interest Rates May Do Something Last Seen in 2022. The Stock Market Will Make a Big Move Afterward if History Repeats

Link copied

Interest Rates May Do Something Last Seen in 2022. The Stock Market Will Make a Big Move Afterward if History Repeats.

watchlist :: 4hrs ago :: source - motley fool

By Trevor Jennewine

ear to date, the S&P 500 (SNPINDEX: ^GSPC) and Nasdaq Composite (NASDAQINDEX: ^IXIC) have added 11% and 13%, respectively. The driving force behind that upside has been strong corporate financial results.

However, the Federal Reserve has become increasingly hawkish in recent months because of the impact of the Iran conflict. Half the members on the rate-setting committee now expect at least one interest rate increase this year. That would mark the beginning of a new tightening cycle (i.e., a period where interest rates are rising).

Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a "Double Down" signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same "Total Conviction" signal is flashing for a company 1/100th the size of Nvidia. Continue »

Historically, the onset of a tightening cycle has frequently coincided with steep declines in the stock market. In fact, the S&P 500 and Nasdaq dropped into correction territory when the Fed initiated its last tightening cycle in March 2022. Here's what investors should know.

Image source: Getty Images.

The market expects the Federal Reserve to raise interest rates this year

In March, the Iran conflict effectively closed the Strait of Hormuz, a critical chokepoint in the Persian Gulf. About 20 million barrels of oil pass through the strait each day, which is equivalent to roughly 20% of petroleum liquids consumed worldwide. The International Energy Agency called it the largest oil supply disruption in history.

Oil prices initially soared to a four-year high, then dropped sharply after the U.S. and Iran announced a peace deal in June. But WTI futures prices (a U.S. benchmark for oil) started rising again last week, when Iranian attacks on commercial oil tankers prompted President Trump to call off the fragile ceasefire.

Meanwhile, CPI inflation soared to 4.1% in May, the highest reading since April 2023. Of course, inflation will probably cool in the months ahead because oil prices remain well below their April peak, but the market still expects the Federal Reserve to raise its benchmark interest rate twice in the next year.

The market is pricing in one quarter-point rate increase in September, followed by a second quarter-point increase in March 2027, per CME Group's FedWatch tool. That aligns with the latest projections from the Federal Open Market Committee (FOMC). Half of FOMC officials said at the June meeting that at least one quarter-point rate increase was likely this year, up from zero at the March meeting.

A rate-raising cycle has often coincided with stock market corrections

Warren Buffett believes interest rates (especially those on government bonds) are the most important variable that affects stock market valuations. "These act on financial valuations the way gravity acts on matter: The higher the rate, the greater the downward pull," he wrote in 1999.

Since 1999, the Federal Reserve has started four tightening cycles, meaning it has pivoted from interest rate cuts to interest rate increases on four occasions. The following chart shows the maximum drawdown in the S&P 500 and Nasdaq Composite during the three-month period following the first increase in each cycle.

ed Starts Raising Rates	Max Drop in S&P 500	Max Drop in Nasdaq
June 1999	8%	7%
June 2004	7%	14%
December 2015	10%	15%
March 2022	17%	22%
Average	10%	15%

Data sources: Federal Reserve, YCharts. The chart shows the peak decline in the S&P 500 and Nasdaq Composite during the three-month period following the Fed's first rate increase in a tightening cycle.

Following the first interest rate increase in a tightening cycle, the S&P 500 and Nasdaq have fallen by an average of 10% and 15%, respectively, at some point in the next three months. In other words, both major stock indexes have typically dropped into market correction territory when the Fed has pivoted from rate cuts to rate increases.

Of course, that doesn't mean the S&P 500 and Nasdaq will suffer a correction if the Fed initiates a new tightening cycle in 2026, but investors should certainly be prepared for that outcome. When the Fed increases its benchmark interest rate, it pushes other rates higher across the economy. And the higher rates climb, the less attractive stocks look relative to bonds.

Should you buy stock in S&P 500 Index right now?

Before you buy stock in S&P 500 Index, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and S&P 500 Index wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you'd have $395,679!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $1,294,805!*

Now, it's worth noting Stock Advisor's total average return is 929% — a market-crushing outperformance compared to 211% for the S&P 500. Don't miss the latest top 10 list, available with Stock Advisor, and join an investing community built by individual investors for individual investors.

See the 10 stocks »

*Stock Advisor returns as of July 14, 2026.

Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CME Group. The Motley Fool has a disclosure policy.

This article was originally published by The Motley Fool