- Across all nine S&P 500 sectors studied since 1999, average monthly returns are highest when rates are flat (+1.14%/month), second-best when rates are rising (+0.76%/month), and actually negative when rates are falling (-0.31%/month).
- Tech and energy are the top performers during rate-hiking cycles (+1.24% and +1.31%/month respectively), defying the conventional view that rising rates hurt growth stocks by increasing the cost of capital.
- Materials and industrials lead during flat-rate environments (+1.52% and +1.44%/month), while healthcare and consumer discretionary offer the least-bad returns during rate cuts — but still deliver meager gains of only 0.29–0.31%/month.
- Financials and energy are the biggest losers when rates fall, averaging -1.32% and -1.00%/month respectively, with energy also carrying the highest volatility (32% annualized) in that environment.
What Happened?
Finance professor Derek Horstmeyer of George Mason University published new research examining how each major S&P 500 sector performs across three interest-rate regimes: rising, flat, and falling. Using SPDR sector ETF data going back to 1999 and defining rate cycles based on the federal funds rate direction over rolling six-month windows, the study produced results that cut against widely held investing assumptions. The headline finding: rate cuts — often celebrated by investors as a tailwind — are actually the worst environment for equities, producing negative average returns with significantly higher volatility. Flat rates are the best environment by this measure, followed by rising rates.
Why It Matters?
The Fed has held rates steady since December, and the market is genuinely split on whether the next move is a cut or a hike given the Iran war’s inflationary pressure. Most retail and even institutional investors operate under the assumption that rate cuts are unambiguously bullish — that cheaper money flows into equities and lifts valuations across the board. This research challenges that framework. The pattern likely reflects that the Fed cuts rates in response to economic deterioration, meaning falling-rate periods are associated with the worst macro conditions even if easier money provides some offset. Conversely, rate hikes tend to accompany strong growth periods, and the economy’s strength outweighs the tighter financial conditions. For the current environment — flat rates amid uncertainty — the historical data actually points to a reasonably favorable backdrop for equities broadly.
What’s Next?
The research has direct tactical implications depending on how the Fed moves from here. If inflation from the Iran war forces rate hikes, history suggests rotating toward tech and energy while trimming defensive positions in consumer staples and healthcare. If the Fed eventually cuts in response to an economic slowdown, the data warns against assuming that’s bullish — and suggests avoiding financials and energy specifically. In the current flat-rate regime, materials and industrials have historically led, worth noting for investors looking for sector positioning while the Fed stays on hold. The study covers nine sectors and excludes real estate and communications due to insufficient historical data.
Source: The Wall Street Journal
