Scenario × Asset Analysis

What Happens to S&P 500 ETF (SPY) When the Fed Raises Rates?

What happens to markets when the Federal Reserve raises interest rates? Rate hike cycle impacts on stocks, bonds, housing, and crypto explained.

S&P 500 ETF (SPY)

$739.17

as of May 18, 2026

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Trigger: Federal Funds Rate

3.64%

Condition: increases (Fed begins tightening)

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By Convex Research Desk · Edited by Ben Bleierⓘ

Data as of May 18, 2026

S&P 500 ETF (SPY)'s response to the fed raises rates is the historical and current pattern of s&p 500 etf (spy) performance during this scenario, driven by the macro mechanism described in the sections below and verified against primary-source data through the date shown.

Also known as: ETF_SPY, S&P 500, SPX, SP500.

Where Do Things Stand in April 2026?No Hikes, But the Pivot Is on the Table

The Fed held the federal funds rate at the 3.50% to 3.75% target range at its April 2026 meeting, the third consecutive hold. The FOMC was split 8 to 4 on the decision, with the statement calling inflation "elevated, in part reflecting the recent increase in global energy prices." The last actual hike was on July 27, 2023, taking the target to the 5.25% to 5.50% peak. The Fed has cut 175 basis points since (six cuts: 50bp September 2024, 25bp November 2024, 25bp December 2024, then three 25bp cuts at the final 2025 meetings). The SPDR S&P 500 ETF (SPY) closed April 28, 2026 at $711.69. The scenario "what happens to SPY if the Fed pivots back to hiking" is hypothetical right now, but the 8-4 dissent and the inflation-elevated language make the pivot a tail risk worth examining. The 10-year breakeven inflation rate at 2.33% sits modestly above the Fed's 2% target. A sustained re-acceleration in inflation that forced the Fed to hike from 3.75% would be the most disruptive scenario for SPY at record highs, because the 2024 to 2026 rally has been substantially driven by the discount-rate compression that Fed cuts produced.

Why Hikes Drive Equities: Discount Rates and the Earnings Channel

Equities respond to Fed hikes through two channels. The discount-rate channel is mechanically negative: higher policy rates raise the discount rate applied to future cash flows and compress growth-equity multiples. Long-duration equities (large-cap tech, the Magnificent 7, anything where most cash flow lies far in the future) are mathematically more sensitive than value-heavy index slices. SPY is currently weighted approximately 35% in the top 10 holdings, dominated by mega-cap tech, which makes the index particularly rate-sensitive. The earnings channel runs the other way. Hikes that come at the start of a strong economic expansion (1994, 2004 to 2006, 2015 to 2018) often coincide with rising corporate earnings that offset the multiple compression, and SPY can grind higher through the entire cycle. Hikes that come into a credit-cycle peak or an inflation shock (2022 to 2023) do not get that earnings offset, and SPY can fall sharply. The 2024 to 2026 backdrop is mixed: corporate profitability remains strong (per the carsongroup.com analysis of 2025 SPY returns), but valuations have expanded substantially through the rate-cut phase. A re-pivot to hiking would collide with rich starting valuations.

Setup 1: 1994 Bond Rout → SPY Modest Gain Despite Bond Crisis

The Fed hiked 250 basis points in 1994, taking the federal funds rate from 3.00% to 5.50% over the year. The first hike was 25bp in February 1994. The bond market response was violent: 30-year Treasury yields rose more than 150 basis points over the first nine months of the year, producing approximately $1.5 trillion in global bond market losses, described as the worst financial event for bond investors since 1927. The S&P 500 itself was relatively resilient through 1994, finishing the year roughly flat to modestly positive. The 1994 cycle is the canonical example of "Fed hikes, bonds get crushed, equities digest." The reason: the underlying economy was accelerating (job growth surprised to the upside), and corporate earnings growth offset the discount-rate compression. The 1994 cycle is the bullish case for SPY through a hypothetical 2026 hiking pivot, IF that pivot is driven by economic strength rather than persistent inflation.

Setup 2: 2015 to 2018 Gradual Hikes → SPY Up 19% Plus Post-Cycle Spike

The Fed hiked from 0.00% to 0.25% to 2.25% to 2.50% over 36 months from December 2015 to December 2018, the longest and most gradual hiking cycle in modern history. The S&P 500 rose from approximately 2,100 in November 2015 to approximately 2,490 by December 2018, a roughly 19% gain over the cycle. After the December 2018 last hike, the index then rallied 27.9% over the following year. The 2015 to 2018 cycle established the modern playbook for "gradual hikes." When the Fed telegraphs hikes well in advance and delivers them slowly enough for corporate earnings to grow into them, SPY can compound through the entire cycle. The post-cycle spike in 2019 captured the relief rally as the Fed pivoted to insurance cuts. The current 2026 setup looks closer to 2018-2019 than 1994: the Fed has telegraphed everything and the market has had years to adjust. A return to hiking from 3.75% would not be a 1994-style shock, but it would be the second hiking cycle in four years, a faster sequence than any in modern history.

Setup 3: 2022 to 2023 Hikes → SPY Lost 18% in 2022

The Fed delivered 525 basis points of hikes over 16 months from March 2022 to July 2023, the fastest hiking cycle in 40 years. Eleven consecutive hikes included four 75-basis-point hikes in 2022 (the largest individual moves since Volcker). The trigger was CPI peaking at 9.1% in June 2022, a 40-year high driven by pandemic supply-chain disruptions, fiscal stimulus, and the energy shock from the Russia-Ukraine war. SPY had its worst year since 2008. The S&P 500 peaked at 4,796 on January 3, 2022, fell 25% to its October 2022 low, and finished the year down approximately 18.1% (some sources cite -19.4%). The first half of 2022 was -21%, the worst six-month start to a year since 1970. Bonds were hit even harder than stocks: TLT lost -31.41% on a NAV basis in 2022, the worst calendar year in the long-duration Treasury ETF's history, and continued falling into October 2023 to its $82.42 cycle low. The 2022 cycle is the bear case for any hypothetical 2026 hiking pivot. SPY at $711.69 sits near record highs after a sustained rally driven by Fed cuts. A re-pivot to hiking with valuations at multi-year highs would be the most disruptive setup for SPY, repeating the 2022 pattern but with less downside cushion since the index has already rallied substantially.

What Should Investors Watch in April 2026?

Three signals would shift the probability of a Fed hiking pivot: First, inflation persistence. The 10-year breakeven inflation rate at 2.33% sits modestly above the Fed's 2% target. The April 2026 FOMC statement specifically cited "the recent increase in global energy prices" as a contributor to elevated inflation. A sustained rise in breakevens above 2.5% or a CPI print north of 3.5% would substantially raise the probability of a hawkish pivot. Second, the FOMC dissent count. The April 2026 meeting featured an 8-4 split, with four members dissenting on whether to cut, hold, or hike. A widening dissent count or a hawkish shift in the median FOMC view (the dot plot at the June 2026 meeting will be the next read) would suggest the Fed is approaching the limit of its cuts at the current 3.50% to 3.75% target range. Third, the term premium. The ACM 10-year term premium reads approximately 0.68% in late April 2026. A move toward 1.0% would suggest the bond market is pricing higher long-run rates and would typically pressure SPY multiples even before the Fed actually hikes. The 1994 cycle delivered a flat SPY through a 250bp hiking cycle. The 2015 to 2018 cycle delivered +19% through 225bp of hikes. The 2022 to 2023 cycle delivered -18% through 525bp of hikes. The differentiator is the speed and the starting inflation backdrop. A hypothetical 2026 hiking pivot from 3.75% would start with inflation already elevated (2.33% breakevens) and SPY at record highs, which historically has been the worst combination for equities.

Scenario Background

When the Federal Reserve raises the federal funds rate, it increases the cost of borrowing throughout the economy. Higher rates make mortgages more expensive, increase corporate debt service costs, raise the bar for business investment returns, and make holding cash and short-term bonds more attractive relative to risk assets. The Fed typically raises rates to combat inflation or to normalize policy after an extended period of accommodation.

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Historical Context

Major hiking cycles include 1994-1995 (300 bps, no recession), 1999-2000 (175 bps, dotcom bust), 2004-2006 (425 bps, housing crisis), and 2022-2023 (525 bps, the most aggressive since the 1980s). The 1994 cycle is the rare "soft landing" example where aggressive hikes did not cause a recession. The 2004-2006 cycle is the cautionary tale, the Fed raised rates 17 consecutive times, eventually triggering the subprime mortgage crisis and the worst financial crisis since the Great Depression. The 2022-2023 cycle was extraordinary for its speed: 525 bps in 16 months, which exposed vulnerabilities in regional banks (SVB, Signature Bank, First Republic) and commercial real estate.

What to Watch For

•Fed language shifting from "further tightening" to "data dependent",signals a pause
•Core inflation declining for 3+ consecutive months
•Housing starts and existing home sales declining sharply
•High yield credit spreads widening above 500 bps
•Initial jobless claims rising above their 12-month moving average