The big things you need to know. First, our review of S&P 500 performance during the Fed hiking cycles that have occurred since the mid 1990s reminded us that the stock market tends to stumble at lift off, with a median initial drop of 9.6% (ex 2022, which was an extreme outlier). This keeps us vigilant for a near-term tier 1/garden variety pullback of 5-10% in the S&P 500. Second, other things that jumped out in our updates this week included the sharp drop in AAII net bulls to levels that have generally marked the low since early 2025 when the liberation day tariffs shocked the market (which suggests investor sentiment is at a crossroads), and the choppiness we continue to see in most major positioning trades (Growth/Value, US/non-US) other than Small Caps which have continued to underperform Large Caps.
If you’d like to hear more, here’s another 5 minutes.
Starting with Takeaway #1: Lessons From Past Lift Offs
cycles dating back to the mid:
The second thing we learned was that there were essentially two kinds of stock market patterns that emerged during the hiking cycles. In 1994-1995 and 2022-2023, the shape of the stock market during the hiking cycle (start to finish) looked a bit like the stock market slid into a hole from which it took a long time to claw its way out. On some stats these were some of the more aggressive hiking cycles (the average basis point per move was 43-47, compared to 25-29 for the other cycles we looked at).
Three of the other cycles –:
While we see Wednesday’s hike as a win for Fed credibility, removing uncertainty, and delivering something a number of macro investors we’ve spoken with thought was needed or inevitable, the fact that we are starting this new phase keeps us vigilant for a near-term tier 1/garden variety pullback of 5-10% in the S&P 500. Note that as of Wednesday’s close (before Thursday’s rally), the S&P 500 was down about 3.2% from its mid August 2026 high. Per our Four Tiers of Fear framework, a tier 1 pullback could take us into the 7000-7400 range in the S&P 500 on an interim basis.
We will be keeping a close eye on economic forecasts, and indicators that we think are important to the equity market outlook and sector selection like ISM manufacturing, ISM new orders, and consumer confidence for signs of softening that can help us understand whether hikes are sparking cyclical fears (page 98-99), which could be more problematic for stocks.
Note that as we tend to do when we run these historical playbooks, we did take a look at S&P 500 sector performance over the duration of the hiking cycles on our list, as well as during the drawdown periods. Here, we found that the historical playbook was generally mixed, with few clear rules of thumb. It did, however, highlight how Technology showed the greatest tendency to outperform the S&P 500 over the duration of the entire hiking cycles. Energy also showed a tendency to outperform over the duration of hiking cycles more than most other sectors.
This was interesting to us because these two sectors have been the two best performing ones in the S&P 500 since late July.
rformance trade was choppy in:
Wrapping up with Takeaway #2: What Else Jumps Out From Our Latest Updates
is a bit below its late March:
o When we look back to past hiking cycles, it’s worth noting that the four-week average on this data set often bottoms out around -20% but also often goes to nearly -40%.
• A lack of leadership. We continue to see signs that the US equity market is struggling to identify which direction it wants to head in some of the major, higher level positioning trades. Within Large Cap, the Growth/Value and momentum trades have both been choppy in very recent trading and this has also remained the case for the US/non-US developed markets relative trade. This makes sense to us, as we simply aren’t seeing strong signals on our work right now about which sides of these trades deserve to outperform in the near-term.
• One exception, where the stock market does seem to be sticking with a preference is Small Cap, which has been underperforming Large Cap since late June.
• While economic fundamentals have been supportive of Small Cap leadership (i.e. rising ISM manufacturing and a strong jobs print in August)…
• …they have been deeply out of favor,…
• ..and valuations are falling below post GFC and long-term averages, we think these dynamics are being overwhelmed by the start of the new hiking cycle. It is also possible investors will soon start harboring doubts about whether those cyclical indicators can remain strong.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.
