This Sector Pops Most After the Final Fed Hike

By TradeSmith Research Team

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The Fed rate hike rhetoric keeps heating up.

After the recent Fed meeting, higher-for-longer is the latest media-driven mantra.

But debates should not be the focal point for investors.

I’m more interested in the opportunity ahead. I recently shared a historical perspective on how stocks perform following the final rate hike.

The evidence proves that a final hike wouldn’t be a death knell for stocks. In fact, since 1980, stocks gain double digits 12 months after the final rate hike whistle blew.

Today’s analysis takes this study one layer deeper, asking the obvious question: “Which sector gains the most after the final rate hike?”

Most might assume that Technology stocks would be the biggest beneficiary. After all, when the Fed raised rates at the fastest rate in decades, tech stocks plummeted.

But, you’d be wrong!

Not only will you get the scoop on the top sector, but I’ll also name an all-star stock to keep on your radar.

Let’s now get to the PROOF.

This Sector Thrives Once Fed Hikes Are Done

To perform this test, I calculated the 12-month forward return for all S&P 500 sectors, beginning on the date of the final hike since 1994.

There’ve been five periods, including 1995, 1997, 2000, 2006, and 2018. Listed below are the findings. All groups see average double-digit gains, but the sector with the best returns?

Financials, which gained 30%!

Health Care isn’t far behind with hefty returns of 29%.

Energy clocks in last place with a 17% move higher.

Check it out:

Financial sector dominance could come as a surprise. But consider a few obvious benefits that final hikes can present:

  • More Deal Flow — Banks can benefit from more deal flow as rates are expected to fall. According to Axios, 2022 was the worst year for the IPO market since 1990.
  • Yield curve steepening — As longer duration rates climb relative to the shorter end, borrowing short to lend long begins to make more economic sense.
  • Private equity resurgence — Lower rates on the horizon should increase the lending appetite of PE firms.
  • Mortgage underwriting — As rates go higher, new mortgages become less attractive. Lower mortgage rates will spur home buying demand.
The setup has a lot of positives BUT let’s dive even deeper into an area that thrives inside the Finance arena: Financial Services.

This area includes asset managers, exchanges, market data providers, lenders, and more.

Below plots the Financial Services sector performance post the final Fed hike since 1994.

Incredibly, the 3-month average return is 13%.

6-months later it jumps 19.1%.

Hold for 12 months and the gain is 34.7%!

That’s a lot of green! Now, let me bring to your attention one financial powerhouse company that’s crushed these returns in the same time frame.

By now you know that I’ve quoted S&P returns for many of my studies. I do that for a reason… It’s the gold standard of benchmarks.

All-Star Stock Alert

Every time you check “the market,” odds are you are pulling up one of their indices, like the S&P 500. This well-known index and others are owned by S&P Global Inc. (SPGI).

The company has been around since 1917 — dominating market data, benchmarks, ratings, and more.

Here’s how the stock has fared after Fed rate hikes since 1994:

  • Average 3-month gains = +20%
  • Average 6-month gains = +29.7%
  • Average 12-month gains = +48.5%

Add to this beautiful backdrop, the company has grown its sales and net income at a 5-year compound annual growth rate (CAGR) of 13% and 16.8%, respectively.

That’s JUICY.

Here’s a chart view of each post-hike period for SPGI:

Source: YahooFinance

There you have it. Financial stocks boomed once the last hike was set and it should be on your radar this cycle.

SPGI benefited handsomely in these regimes. Add to it the 100+ years of business history and solid growth metrics — and you’re looking at a great potential setup.

That’s the TradeSmith way.

Don’t argue on the path of hikes — find the opportunity through data.