The Federal Reserve has not raised interest rates since July 2023. Nearly three years later, the hike conversation is back.
The fed funds target range sits at 3.50% to 3.75%, its lowest level in more than three years. Markets are pricing in near-certainty that the Fed holds at the June 16-17 meeting, Kevin Warsh's first as chair. But futures pricing puts the odds of at least one quarter-point hike by December at roughly even, and some measures run higher. May inflation printed 4.2%, the first 4-handle in three years, with an energy supply shock from the Middle East conflict feeding the number.
That makes this a good moment to answer the question investors are typing into Google again: what actually happens to stocks when the Fed raises rates?
What the Last Hiking Cycle Did
The 2022-2023 cycle is the freshest case study, and it was brutal. The Fed lifted rates from near zero to above 5% in about 16 months, the fastest pace since the early 1980s.
The S&P 500 fell about 19% in 2022. The Nasdaq lost roughly a third. Long-term Treasuries, the asset most investors consider safe, lost roughly 31% that year as measured by the iShares 20+ Year Treasury Bond ETF.
But the damage was not evenly spread. Energy was the only S&P 500 sector to finish 2022 higher, gaining nearly 60%. Utilities and consumer staples roughly held their ground. The destruction concentrated in long-duration assets: unprofitable tech, speculative growth, and anything valued on earnings a decade away.
Not every hiking cycle plays out that way. In 1994, the Fed roughly doubled rates in a single year and the S&P 500 finished roughly flat. The speed of the hikes and where valuations start matter as much as the direction.
Banks Usually Earn More
Banks make money on the spread between what they pay depositors and what they charge borrowers. Rising rates typically widen that spread.
JPMorgan Chase is the cleanest example. Its net interest income ran near a record $90 billion a year at the peak of the last cycle. The stock trades near $311 today, at around 14 times forward earnings with a 1.9% dividend yield, after setting a 52-week high of $337.
Bank of America is more rate-sensitive than most large banks because of its large deposit base. It trades near $54, within striking distance of its 52-week high of $57.55.
The caveat: speed kills. The 2023 regional bank failures happened because rapid hikes crushed the value of bond portfolios faster than banks could adjust.
The SPDR S&P Regional Banking ETF trades near $72, about 29% above its 52-week low, but the group carries more balance-sheet risk in a hiking cycle than the giants. Higher margins help regional banks. Falling bond values and deposit flight hurt them. Both forces fire at once.
Bond Proxies Get Repriced
Utilities and telecoms are bought for their dividends. When Treasury yields rise, those dividends face direct competition from an asset with no business risk.
Verizon yields around 6% and trades near $47.73 at roughly 11 times trailing earnings. With the 10-year Treasury around 4.55%, the gap between Verizon's yield and the risk-free rate is the cushion. A hiking cycle compresses that cushion, and the stock price typically adjusts downward to restore it.
The utilities face the same math. NextEra Energy trades near $85.53, about 13% below its 52-week high, with a dividend yield below 3% and a stated plan to grow the payout roughly 10% a year. A sub-3% yield competing against a 4.5% Treasury only works if that dividend growth shows up. Duke Energy sits near $125.71 with a higher current yield but slower growth, the classic trade-off inside the sector.
Utilities also carry heavy debt loads to fund grid and generation buildouts. Higher rates raise their borrowing costs at the same time their dividends lose relative appeal.
Housing Feels It First
Homebuilders are the most direct rate transmission in the equity market. Mortgage rates track the 10-year Treasury, and every move higher prices more buyers out.
D.R. Horton, the largest U.S. builder by volume, trades near $148, about 20% below its 52-week high of $184.55 and below its 200-day average. The market has already marked the group down as the 30-year yield pushed above 5%. A formal hiking cycle would extend that pressure, though builders with land-light models and incentive budgets have absorbed more than past cycles suggested they could.
Long bonds are the purest expression of the trade. TLT trades near $85, close to its 52-week low. With a duration near 16 years, a one-percentage-point rise in long yields takes roughly 16% off its price. Investors holding long Treasuries as a safety asset are holding the asset a hiking cycle punishes most.
What to Watch on June 16-17
We flagged after the May jobs report that the rate conversation had flipped from cuts to hikes, and this week's CPI print hardened that view. Next week's meeting is where the Fed either validates the market's hike pricing or pushes back.
Three things matter more than the decision itself. First, the dot plot: if the committee's median projection shows a hike in 2026, the debate is no longer theoretical. Second, dissents: a split vote signals how hard Warsh will have to fight to move in either direction. Third, the language on energy: if the statement treats oil-driven inflation as something policy must answer, the hike trade gets real.
If a hike comes, history says to expect banks to hold up, bond proxies to reprice, and the longest-duration assets to take the hit. If the Fed holds the line and oil retreats, the bond proxies trading at multi-month discounts are the group with the most coiled spring. Either way, the next dot plot tells you which portfolio you should be stress-testing.
