What to buy after the Federal Reserve raises interest rates? Historically, US energy and technology stocks outperform while real estate lags. Goldman Sachs: The pace of rate hikes determines the US stock market.

After the Federal Reserve's first rate hike since July 2023 was implemented, the question for investors has shifted from "Will rates rise?" to "What to buy after the hike?".

Historical statistics from previous tightening cycles reveal: U.S. equities in the energy and information technology sectors are the most resilient, while real estate and consumer discretionary are the most vulnerable. More crucial than the absolute level of interest rates is the speed at which yields rise in determining the fate of different sectors.

On September 16 local time, the Federal Reserve raised its federal funds rate target range by 25 basis points to 3.75%—4.00%, marking the first rate hike since July 2023. Most officials still anticipate further room for rates to rise.

Historically, Jefferies data shows that energy stocks in the U.S. market posted the highest average return of 22.4% in the twelve months after the first rate hike, followed by information technology at 15.4%; Charles Schwab's statistics indicate that the real estate sector underperformed the S&P 500 median by 4.3 percentage points, the worst among 11 sectors.

U.S. homebuilder stocks have lagged the equal-weighted S&P 500 by 16 percentage points since June, which is exactly a preview of this mechanism playing out.

Goldman Sachs further points out that the greatest shock to sector rotation comes not from rate levels, but from the speed of hikes—under current market volatility, a 50 basis point rise in 10-year U.S. Treasury yields within a month, or a 30 basis point rise within two weeks, constitutes "rapid tightening" pressure.

Energy and Information Technology: A Resilient Blend of Cash Flow and Pricing Power

Energy is the historically best-performing sector, with the most consistent conclusions across different statistical measures.

Jefferies' review of rate hike cycles since 1983 finds that, in the 12 months after the first hike, the energy sector posted an average return of 22.4%, ranking first among major industries; information technology followed with an average return of 15.4%.

Charles Schwab's research on the five cycles from 1994 to 2015 similarly shows that one year after the first hike, the energy sector delivered about a 5 percentage point median excess return over the S&P 500, leading all 11 industries.

The logic behind the resilience of these two sectors is not the same. Energy companies benefit from rising commodity prices and robust free cash flow in an inflationary environment; large technology companies, thanks to high profit margins, pricing power, and strong balance sheets, can partially or even fully offset the impact of lower valuation multiples through earnings growth.

Goldman Sachs believes that if companies can boost long-term growth through capex and R&D, stronger growth expectations can offset valuation pressure from rising rates—thus, for the tech sector, whether AI investments can ultimately translate into productivity and earnings growth becomes a key variable.

The overall market’s performance confirms the "weak before strong" pattern. LPL Research’s statistics on the six major tightening cycles since 1994 show the S&P 500’s average return in the first 4 months after the initial hike was still negative, but improved significantly in months 5 and 6, with an average gain of 6.7% and a median gain of 10.7% one year after the first hike.

Goldman Sachs reaches a similar conclusion based on seven cycles since 1988: On average, the S&P 500 fell about 2% in the three months after the first hike, but over a year, the average return turned positive to about 9%, with only 2022 seeing negative returns a year later.

Real Estate and Consumer Discretionary: Systemic Pressure on Rate-Sensitive Assets

In stark contrast to energy and tech, real estate has almost invariably been the worst performer in rate hike cycles.

According to Charles Schwab’s sector statistics, one year after the first rate hike the real estate sector’s median relative performance lags the S&P 500 by about 4.3 percentage points—the worst among 11 sectors; consumer discretionary lags by about 4 points, consumer staples and materials each lag by around 3.5 points, while industrials trail by around 2.1 points.

Real estate is the most directly exposed to interest rates. On the one hand, REITs use large amounts of debt financing, and rising financing costs directly compress returns; on the other, higher long-term rates push up mortgage rates, weakening purchasing power for homes.

Goldman Sachs points out that homebuilders have become one of the market’s most interest rate-sensitive areas, lagging the equal-weighted S&P 500 by 16 percentage points since June. Consumer discretionary pressure comes mainly from households—higher credit card, auto loan, and mortgage rates increase repayment burdens, squeezing big-ticket consumption willingness.

The Speed of Rate Hikes Matters More Than the Level

The most important warning from historical statistics is that U.S. equity performance is determined not merely by the level of interest rates, but also by the speed at which rates rise.

Surging inflation in 2022 forced the Fed into rapid catch-up, raising the federal funds target range from 0%—0.25% to 4.25%—4.50% in just nine months, with multiple consecutive hikes of 50 and 75 basis points—a key reason why 2022 was a negative outlier in several historical datasets.

Goldman Sachs research demonstrates that in past decades, U.S. equities have generally delivered positive returns during moderate rate rises; real market strain often occurs when the pace of yield increases exceeds normal levels by about two standard deviations. At current volatility, that equates to 10-year Treasury yields rising 50 basis points in a month or 30 basis points in two weeks.

Goldman Sachs further notes that the recent rise in oil prices is one factor pushing up long-term Treasury yields, which are now hovering near 5%.

The financial sector’s historical performance is the most complex, as there's no stable "rate hikes equal stock gains" rule. Charles Schwab’s data from the last five cycles shows financials delivered a median excess return of about 2.5 percentage points one year after the first hike, whereas Jefferies, using another sample set, found the sector’s average return after a year fell 0.2%.

Whether banks benefit from rate hikes depends on the yield curve, deposit costs, loan demand, and whether the economy slows markedly from tightening, rather than just on short-term policy rate changes alone.

For equity investors, the next set of data worth monitoring is the rate of change—or slope—of the 10-year Treasury yield, and whether it triggers Goldman’s "rapid tightening" threshold.