Which equity factors win when rate hikes begin?

Barclays' analysis of historical Federal Reserve rate hike cycles reveals a clear pattern in equity sector performance leading up to and following the onset of tightening measures. In the three months preceding a Fed rate hike, the S&P 500 typically experienced a median gain of 2.2%, while small-cap equities remained relatively stagnant.

During the first quarter following a rate hike, small-cap equities, particularly in Energy and Industrials, faced significant underperformance, with the Russell 2000 posting a median loss of 7.2% compared to the S&P 500's 3.9% decline. Financials were the worst-performing sector, with a median return of -8.4%, followed by traditionally defensive sectors such as Healthcare, Utilities, and Consumer Staples.

The shift in sector leadership from Energy and Industrials to Financials and Healthcare post-hike highlights the impact of tightening monetary policy on market dynamics. Barclays also noted that Value outperformed Growth, particularly in small caps, while Momentum initially outperformed before becoming range-bound. These findings suggest that investors should anticipate changes in sector leadership and factor performance in the wake of Federal Reserve rate hike cycles.

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