What to buy after the Fed raises interest rates? Historically, energy and technology stocks have outperformed US stocks, while real estate has lagged behind. Goldman Sachs: The pace of interest rate hikes determines the performance of US stocks.

With the Federal Reserve raising interest rates for the first time since July 2023, the question investors need to answer has shifted from "Will there be another rate hike?" to "What should I buy after the rate hike?"

Historical statistics on previous tightening cycles suggest that the energy and information technology sectors in the US stock market are the most resilient, while real estate and discretionary consumption are the most vulnerable. The key factor determining the fate of these sectors is not the absolute level of interest rates, but rather the rate at which yields rise.

On September 16 local time, the Federal Reserve raised the target range for the federal funds rate by 25 basis points to 3.75%–4.00%, marking the first rate hike since July 2023. Most officials still expect further upward movement in interest rates.

Historically, Jefferies data shows that in the 12 months following the first interest rate hike, the energy sector had the highest average return at 22.4%, followed by information technology at 15.4%. Charles Schwab's statistics, however, show that the real estate sector lagged behind the S&P 500 median by 4.3 percentage points, making it the worst performing of the 11 sectors.

US residential construction stocks have lagged behind the equal-weighted S&P 500 by 16 percentage points since June, a clear indication of this mechanism.

Goldman Sachs further pointed out that the biggest impact on sector rotation is not the interest rate level, but the speed of interest rate hikes—given the current market volatility, a 50 basis point increase in the 10-year US Treasury yield within a month, or a 30 basis point increase within two weeks, would constitute pressure for "rapid interest rate hikes."

Energy and Information Technology: A Resilient Combination of Cash Flow and Pricing Power

Energy is the sector with the most outstanding historical performance and the most consistent conclusions drawn from different statistical methods.

Jefferies' review of interest rate hike cycles since 1983 found that the energy sector had an average return of 22.4% in the 12 months following the first rate hike, ranking first among major sectors; information technology followed closely with an average return of 15.4%.

Charles Schwab's research, based on five cycles from 1994 to 2015, also shows that the energy sector's median excess return relative to the S&P 500 was about 5 percentage points one year after the first interest rate hike, ranking first among all 11 industries.

The two sectors have different resilience mechanisms. Energy companies benefit from rising commodity prices and strong free cash flow in an inflationary environment; large technology companies, on the other hand, leverage their high profit margins, pricing power, and balance sheet resilience to partially or even completely offset the impact of declining valuation multiples through earnings growth.

Goldman Sachs believes that if companies can improve long-term growth through capital expenditure and R&D, stronger growth expectations can offset valuation pressures from rising interest rates—and for the technology sector, whether AI investment can ultimately translate into productivity and profit growth has thus become a key variable.

The overall market performance confirms the "weak at first, strong later" pattern. LPL Research statistics show that during the six major tightening cycles since 1994, the S&P 500's average return was still negative in the first four months after the first rate hike, but improved significantly from the fifth to the sixth month. Twelve months after the first rate hike, the average return was 6.7%, and the median return was 10.7%.

Goldman Sachs' conclusions, based on seven cycles since 1988, are consistent: the S&P 500 fell by an average of about 2% three months after the first rate hike, and turned positive to an average increase of about 9% over a year. Of the seven cycles, only 2022 saw a negative return a year later.

Real Estate and Consumer Discretion: Systemic Pressure on Interest Rate-Sensitive Assets

In stark contrast to energy and technology, real estate has almost invariably lagged behind in every interest rate hike cycle.

Charles Schwab's industry statistics show that one year after the first interest rate hike, the real estate sector lagged behind the median performance of the S&P 500 by about 4.3 percentage points, making it the worst performing of the 11 sectors; consumer discretionary lagged behind by about 4 percentage points, consumer staples and raw materials lagged behind by about 3.5 percentage points respectively, and industrials lagged behind by about 2.1 percentage points.

The real estate sector has the most direct impact on interest rates. On the one hand, real estate investment trusts (REITs) rely heavily on debt financing, and rising financing costs directly compress returns; on the other hand, rising long-term interest rates push up mortgage rates, weakening purchasing power for residential properties.

Goldman Sachs points out that residential construction stocks have become one of the most sensitive market sectors to long-term interest rates, lagging behind the equal-weighted S&P 500 by 16 percentage points since June. Pressure on discretionary consumption comes from the household side—higher credit card, auto loan, and mortgage rates increase debt burdens and squeeze the willingness to make large purchases.

The pace of interest rate hikes is more crucial than the level of interest rates.

The most important lesson from historical statistics is that the performance of the US stock market is determined not only by the level of interest rates, but also by the speed at which interest rates rise.

The sharp rise in inflation in 2022 forced the Federal Reserve to catch up quickly, raising the target range for the federal funds rate from 0%-0.25% to 4.25%-4.50% within nine months. During this period, it implemented several large interest rate hikes of 50 and 75 basis points, which is an important background for 2022 becoming a negative outlier in many historical statistics.

Goldman Sachs research shows that U.S. stocks have typically achieved positive returns during periods of moderate interest rate increases over the past few decades. The real market pressure often arises when yields rise at a rate approximately two standard deviations above normal. At current market volatility levels, this roughly corresponds to a 50 basis point increase in the 10-year U.S. Treasury yield within a month, or a 30 basis point increase within two weeks.

Goldman Sachs also pointed out that the recent rise in oil prices is one of the factors driving up the yields on long-term US Treasury bonds, with the 10-year yield currently around 5%.

The financial sector's historical performance is the most complex, lacking a stable "rate hike always leads to a rise" pattern. Charles Schwab's previous five-cycle statistics showed that financial stocks had a median excess return of approximately 2.5 percentage points one year after the first rate hike. However, Jefferies, using a different historical sample, found that the financial sector fell by an average of 0.2% one year later.

Whether banks can benefit from interest rate hikes depends on the yield curve, deposit costs, loan demand, and whether the economy slows significantly due to tightening, rather than a single change in short-term policy rates.

For equity investors, the next set of data worth tracking is the slope of the 10-year US Treasury yield and whether it triggers the "rapid rate hike" threshold defined by Goldman Sachs.

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