The Chances of a Federal Reserve December Rate Hike Are Climbing. Here’s What History Says About Stocks After the Fed Starts Raising Again.

Interest rates are climbing again. The Federal Reserve Open Market Committee (FOMC) enacted its first rate hike in more than three years in September. And now it's looking increasingly likely the Fed will implement another rate hike at its December meeting. Inflation continues to run well above the Fed's target 2% rate while the labor market has remained solid. That gives the Fed room to focus on the "stable pricing" side of its dual mandate.

But interest rates and stock prices generally move in opposite directions. Continued rate hikes from the Fed could send stock prices lower. Here's what history says happens to the S&P 500 (SNPINDEX:^GSPC) once the Fed starts a rate-hiking cycle in earnest.

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What will the December meeting bring?

Investors have long expected the Fed to enact a second rate hike of the year at its December meeting, following a pause at the October meeting. Those expectations soared, however, after the October CPI report. The inflation index climbed 0.4% month over month, ahead of expectations. (Note, there's no year-over-year reading as the government shutdown prevented the BLS from collecting and compiling CPI data in late 2025.)

Futures traders had implied an 84% chance of a rate hike before the CPI release. Now they're pricing in a 100% chance of a rate hike, with an outside chance of a 50-basis-point increase in the fed funds rate instead of the standard 25-basis-point hike.

It's a careful balancing act for the committee. Tightening credit too much can restrict the economy to the point where few businesses can grow earnings. That's especially noteworthy today, as many AI companies have significant capital needs and are already facing challenges securing the capital they need to fund their growth plans. With AI development contributing significantly to economic growth, a sudden climb in interest rates could weigh heavily on the economy and the AI-company-led stock market.

The labor market easily absorbed the Fed's first rate hike in September, though. The U.S. added 165,000 jobs in October, well ahead of analysts' expectations. Another strong jobs number at the start of December could give the FOMC more room to hike rates before finding a more restrictive level.

Here's what more rate hikes mean for the stock market

When it comes to hiking cycles, the speed at which the Fed raises rates matters.

Charles Schwab analysts examined rate-hiking cycles dating back to 1946, categorizing them as fast, slow, or non-cycles. In fast cycles, the FOMC raises rates nearly every meeting. In slow cycles, there's at least one meeting without a rate hike before the next rate increase. In non-cycles, the Fed raises rates two or fewer times before the next rate cut.

The analysts show a clear difference between the market's performance in fast cycles compared to slow or non-cycles. The S&P 500 experiences an average drawdown of about 12% during slow and non-cycle periods over the 12 months following the first rate hike. In fast cycles, stocks fall an average of 16.5% at some point during that first year.

The average 12-month return also speaks to the difference. Slow and non-cycles continue to produce average returns in line with the historical average returns of the S&P 500 between 10.5% and 11.5%. Fast tightening cycles produce an average 12-month return of-3.6%. That said, fast-tightening cycles close the gap a bit more than slow cycles (which can last longer) in the second year after the first rate hike. Slow cycles produce an average second-year return of just 1.6% versus 7.8% for fast cycles.

Overall, history suggests an extended rate-hiking cycle will weigh on the S&P 500 sooner or later. That's no reason to abandon stocks, though. Higher interest rates also weigh on bond prices, and investors should heed the usual advice: Past performance is not an indicator of future results. Consider the current environment and how it could affect the Fed’s decisions, and how those decisions could affect the stocks in your portfolio, before making any moves based solely on historical averages.

Charles Schwab is an advertising partner of Motley Fool Money. Adam Levy has positions in Charles Schwab. The Motley Fool recommends Charles Schwab and recommends the following options: short September 2026 $95 calls on Charles Schwab. The Motley Fool has a disclosure policy.