TL;DR
· Goldman Sachs analyzed the past 7 Federal Reserve rate hike cycles and found that the S&P 500 fell by an average of about 2% in the 3 months after the first rate hike, but rose by an average of 9% after 12 months, recording positive returns in all cycles except 2022.
· This year, the S&P 500 forward P/E has fallen from 22x to 19x, but the valuation premium of stocks relative to bonds has not noticeably deteriorated further, meaning that part of the impact of rising rates has already been priced in by the market.
· Goldman Sachs believes that what U.S. equities truly need to watch out for is not just "high rates," but long-bond yields rising too quickly. This currently roughly corresponds to a 50bp rise in the 10-year Treasury yield over one month, or a 30bp rise over two weeks.
· "Long-duration" growth stocks with high valuations and low current profits are most sensitive to rates; the homebuilding sector is also under pressure. Financial stocks, by contrast, typically benefit more from rising rates.
· For large companies, short-term financing pressure remains relatively manageable, because most debt is fixed-rate and long-dated. What ultimately determines medium-term stock performance is still whether corporate earnings growth can offset valuation compression.

A Federal Reserve rate hike seems imminent, but for U.S. equities, the "rate hike" itself may not be the most important issue.

Goldman Sachs U.S. chief equity strategist Ben Snider pointed out in a latest report that, based on historical experience, after the Federal Reserve begins a rate hike cycle, U.S. equities often first go through a period of adjustment, but if the observation period is extended to one year, the result is usually gains instead.

In the 7 rate hike cycles over the past several decades, the S&P 500 fell by an average of about 2% in the 3 months after the first rate hike; but the average return after 12 months reached 9%, with positive returns in all other cycles except 2022. At the same time, the rates market has already priced in expectations of multiple rate hikes through mid-2027, so if the Fed's eventual policy path does not significantly exceed current pricing, the room for further "hawkish surprises" may have already diminished somewhat.

Snider believes this means that what truly determines medium-term U.S. equity performance is not the first rate hike itself, but how tightening policy ultimately affects corporate earnings growth.

Valuations have already fallen first, but stocks have not suddenly become more expensive than bonds

Since the start of this year, U.S. equity valuations have in fact already undergone a clear round of compression.

The S&P 500's forward 12-month P/E has already fallen from about 22x at the beginning of 2026 to 19x. Goldman Sachs believes this reflects both market doubts about the return on AI investment and investor concerns about whether the recent high earnings growth can continue, while rising rates are also an important factor.

The 10-year U.S. Treasury yield has now climbed to about 5%, the highest level since 2007. Goldman Sachs rate strategists believe that rising oil prices, repricing of the Federal Reserve's policy path, continued strength in the U.S. economy, and sustained expansion of AI-related capital expenditures have jointly driven long-end rates higher.

However, from the perspective of relative valuations between stocks and bonds, the situation has not deteriorated markedly.

The S&P 500 earnings yield is currently about 5.2%, while the real 10-year U.S. Treasury yield is about 2.6%, leaving a gap of roughly 270 basis points between the two. Goldman Sachs views this as a simple equity risk premium indicator. Apart from brief periods of sharp market selloffs, this spread has remained broadly stable over the past two years.

In other words, absolute U.S. equity valuations are declining as rates rise, but relative to bonds, there has not been a clear new round of valuation imbalance.

What matters more than a "5% Treasury yield" is how fast it got there

Goldman Sachs especially emphasizes that what affects the stock market is not just the level of rates, but the speed at which they rise.

Historically, as long as the pace of rate increases remains within a relatively normal range, U.S. equities can typically coexist with rising rates. What truly tends to create market stress is a rapid jump in bond yields over a short period.

According to Goldman Sachs' current estimates, if the 10-year U.S. Treasury yield rises about 50 basis points in one month, or about 30 basis points in two weeks, that would roughly amount to more than two standard deviations above historical normal volatility. The recent difficulty for U.S. equities in digesting changes in the bond market is largely because yields have risen too quickly.

Moreover, compared with short-term policy rates, U.S. equities are more sensitive to long-term rates.

Goldman Sachs estimates that about 75% of the S&P 500's present value comes from cash flows 10 years out or even further. Therefore, when long-term risk-free rates such as the 10-year and 30-year rise, the value of future cash flows discounted back to today declines, directly pressuring equity valuations.

This also explains why some "long-duration stocks" are especially vulnerable—for example, growth companies with low current profits but high market expectations for future growth, whose value comes more from earnings far in the future. Once the discount rate rises, the hit to their valuations is more pronounced.

AI stocks and the broader technology sector are currently mildly negatively correlated with real rates. Another more obviously sensitive sector is homebuilding: over the past few months, homebuilder stocks have moved almost inversely to bond yields, underperforming the equal-weighted S&P 500 by about 16 percentage points since June.

In contrast, financial companies' profits often have a better chance of benefiting from a higher interest rate environment.

However, Goldman Sachs also cautioned that historically there is no stable "rate hike winner sector." In the three months after past rate hike cycles began, energy and tech stocks performed best on average, while healthcare performed worst, but no sector was able to consistently outperform or underperform across successive rate hike cycles.

Will rate hikes ultimately hit corporate earnings?

Another key question is whether corporate profits will begin to be significantly eroded as financing costs rise.

Goldman Sachs believes that for large S&P 500 companies, near-term risks remain relatively limited.

Although bond yields have continued to rise in recent years and the actual borrowing costs of S&P 500 companies have also increased, the magnitude has not been particularly large. An important reason is that most existing debt of large companies is fixed-rate and has long maturities, so rising market interest rates will not immediately be fully transmitted to corporate interest expenses.

At the same time, with profit levels still relatively high, interest expenses remain a small share of corporate earnings. By contrast, small companies typically have weaker balance sheets and a higher proportion of floating-rate debt, making them more sensitive to rising interest rates.

This is also why Goldman Sachs ultimately brought the issue back to growth.

When rising interest rates drive up the cost of equity capital, companies that want to maintain their original valuations must either convince investors that their risk has declined, leading them to accept a lower risk premium, or prove that future growth will be faster.

Goldman Sachs estimates that if the cost of equity capital rises by 1 percentage point, long-term expected growth would need to increase by about 2 percentage points to fully offset that valuation pressure.

Therefore, in a high interest rate environment, capital expenditures, R&D investment, M&A, and even business spin-offs may all become more important: they are not only tools for corporate expansion, but also a way for companies to try to hedge a higher discount rate with higher growth.

From this perspective, the real test for U.S. stocks from this round of Federal Reserve rate hikes may not be the 25 basis points itself.

If long-term bond yields rise only modestly while the economy and corporate earnings continue to grow, historical experience shows that U.S. stocks may still be able to digest higher interest rates; but if long-end yields continue to jump rapidly while corporate earnings expectations begin to be revised downward, then the dual pressure of "valuation compression + weakening earnings" could become a greater risk.

Therefore, after this week's FOMC, in addition to watching whether the Fed continues to signal further rate hikes, the market should also pay attention to three variables: the 10-year U.S. Treasury yield and the pace of its rise, corporate earnings expectations, and whether AI capital expenditures can continue to translate into actual growth.

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