Fed Rate Hikes Historically a Headwind, Not a Bull Market Killer, Citi Says

The start of a Federal Reserve interest rate hiking cycle often sparks short-term market volatility but does not typically end an equity bull market, according to a historical analysis by Citi. The bank's research, which dates back to the 1970s, suggests global stocks tend to recover and post gains within a year of the initial hike, a key takeaway as its economists expect the Fed to raise rates this week.

Short-Term Volatility, Long-Term Gains

Citi's analysis found that global equities tend to "wobble" around the beginning of a tightening cycle. Historically, stocks have risen only one-third of the time in the three months immediately following the first rate increase.

However, the outlook improves significantly over a longer time horizon. In the majority of past cycles, equities were higher 12 months after the first hike, climbing by an average of 7%. "It is not the first Fed hike that ends equity bull markets," Citi's note stated, adding that the initial volatility has typically been a buying opportunity for investors with a one-year view.

A Shift in Market Leadership

The research also identified consistent patterns of rotation across regions and investment styles during these periods. Citi advised that investors should look for opportunities outside of the United States.

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Key historical trends include:

• Regional Shifts: U.S. markets have historically underperformed, while Japan and Europe have outperformed.
• Emerging Markets: Within emerging markets, Brazil and India tend to lead, while China typically lags.
• Style & Sector: Investors have historically been rewarded for rotating into value stocks and, to a lesser extent, cyclicals.

Broader Context and Outlook

The expected Fed move is part of a broader global shift toward monetary tightening, with Citi also forecasting rate increases from the Bank of Japan, the European Central Bank, and the Bank of England. This environment has seen benchmark 10-year U.S. Treasury yields climb above 5%.

Despite advocating for short-term caution amid stagflationary risks from geopolitics, Citi reiterated its call for further earnings-driven gains in global equities through mid-2027.