What happens to stocks when the Fed starts hiking? Barclays weighs in

When the Federal Reserve begins raising interest rates, U.S. stock markets have historically performed well, according to a Barclays report. The S&P 500 has consistently generated positive annualized returns in every tightening cycle since the 1990s, ranging from 0.1% to 7.8%, with a median gain of 5.6%. Barclays strategists analyzed equity performance during each rate hike cycle, noting that these hikes typically occur during robust growth periods.

However, Barclays warned that investor perception is crucial, as market dynamics can vary depending on whether the central bank is seen as ahead or behind the curve. During the 2022-2023 inflation battle, defensive sectors like real estate, utilities, and financials underperformed, while tech and energy stocks surged. Historically, technology and energy have yielded the highest median annualized returns during rate hike cycles at 14% and 8.8%, respectively.

Despite their strong average gains, both sectors exhibited significant performance dispersion, with tech experiencing annualized declines of 1.5% and energy declining by 2% in their worst-performing cycles. Barclays highlighted its rebalanced Resilient Software Basket, a 20-stock long basket designed to identify technology equities poised to handle changing market conditions.

Top holdings in the basket include Palantir Technologies (10% weight), Cadence Design Systems (9%), Zscaler (6.38%), Autodesk (5.87%), and Fair Isaac Corp (3.9%).