Historical data shows that a single interest rate hike is not enough to end a bull market; a complete tightening cycle is the real threat.

Amid rising expectations of a Federal Reserve rate hike, Wall Street strategists have not turned bearish on US stocks. Morgan Stanley, JPMorgan Chase, and Goldman Sachs believe that the market has already priced in a policy shift, and corporate profits and economic growth remain the main factors supporting the stock market. A single rate hike is unlikely to change the medium-term direction of this market rally.

The market currently estimates an 87% probability of a Federal Reserve rate hike this week, which, if implemented, would be the first rate hike in three years. Meanwhile, the S&P 500 is less than 2% away from its all-time high, and corporate earnings remain strong. More than the rate hike itself, strategists are concerned about whether tighter monetary policy will further suppress economic activity and corporate profits.

Historical experience also shows that sustained interest rate hikes and recessions are often more likely to trigger bear markets than a single policy adjustment. Bloomberg analysis shows that since 1945, the S&P 500 has experienced 12 bear markets with declines exceeding 20%, and 4 deep corrections with declines between 18% and 20%. Six of these occurred after an economic recession was directly caused by an interest rate hike cycle, while the other two were not triggered by either an interest rate hike cycle or a recession.

Current short-term pressures primarily stem from inflation and interest rates. Oil prices continuing to climb above $100 per barrel, and the 10-year US Treasury yield approaching 5%, have reignited market concerns about inflationary pressures. US stocks have been fluctuating since hitting record highs in mid-August, with Nasdaq 100 futures falling 1.6% on Monday.

What Wall Street thinks: Earnings, yields, and oil prices are the three main drivers.

Goldman Sachs' chief U.S. equity strategist, Ben Snider, stated that the market has already priced in expectations of more than three rate hikes over the next year, while corporate earnings and balance sheets remain robust. Therefore, the policy shift itself may have a limited impact on the stock market.

Morgan Stanley strategist Michael Wilson is focusing on US Treasury yields. If the inflation shock significantly exceeds expectations, US stocks could experience a technical correction of around 10%. Especially given the backdrop of oil prices regaining $100 per barrel and ongoing geopolitical tensions in the Middle East, further increases in long-term yields could put pressure on overvalued stocks.

However, Wilson believes it's necessary to distinguish the reasons for the rising yields. If the rise in 10-year Treasury yields primarily reflects stronger nominal economic growth rather than runaway inflation, then the stock market still has some room to withstand the pressure. In this scenario, stocks could even continue to serve as a hedge against inflation to some extent.

JPMorgan's strategy team views oil prices as a key variable in the near-term market. Continued increases in oil prices could push up inflation expectations and further compress stock valuations; conversely, if oil price pressures ease, the market will be more likely to absorb the impact of interest rate hikes.

JPMorgan's head of equity strategy, Mislav Matejka, also cautioned that September is typically a relatively weak month for US stocks, and seasonal factors could amplify recent volatility. However, in the longer term, the market's ability to maintain its strength depends on economic and earnings performance, rather than a single policy event.

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