Historical data shows that a single rate hike is not enough to end a bull market; a full tightening cycle is the real threat.

As expectations for a Federal Reserve rate hike heat up, Wall Street strategists have not turned bearish on U.S. stocks as a result. Morgan Stanley, JPMorgan, and Goldman Sachs believe that the market has largely priced in the policy shift, with corporate earnings and economic growth remaining the main supports for the stock market. A single rate hike is unlikely to change the medium-term direction of the current rally.

The market currently estimates there is an 87% probability of a Fed rate hike this week, which, if realized, would be the first hike in three years. At the same time, the S&P 500 index is less than 2% from its all-time high, and corporate earnings remain robust. Compared to the hike itself, strategists are more concerned whether monetary policy tightening will further suppress economic activity and company profits.

History also shows that sustained rate hikes and recessions are more likely triggers for bear markets than single policy adjustments. Bloomberg analysis indicates that since 1945, the S&P 500 index has experienced twelve bear markets with declines exceeding 20%, and four deep corrections with drops between 18% and 20%. Of these, six occurred after rate hike cycles directly led to a recession, while two others were triggered by neither rate hikes nor a recession.

Current short-term pressures primarily stem from inflation and interest rates. Oil prices continue to hover above $100 per barrel, and the 10-year U.S. Treasury yield is approaching 5%, both reigniting concerns about inflation. Since making a record high in mid-August, U.S. stocks have been volatile, with the Nasdaq 100 futures dropping 1.6% on Monday.

Wall Street’s View: Earnings, Yields, and Oil Prices Are the Three Main Themes

Goldman Sachs' chief U.S. equity strategist, Ben Snider, stated that the market has already digested expectations for more than three rate hikes over the next year, while corporate earnings and balance sheets remain strong. Therefore, the policy shift itself may have a limited impact on the stock market.

Morgan Stanley strategist Michael Wilson is focusing his attention on U.S. Treasury yields. If inflation shocks significantly exceed expectations, U.S. stocks could see a technical correction of about 10%. Especially as oil prices rise above $100 per barrel and Middle East geopolitical tensions persist, a further rise in long-term yields may put more pressure on high-valuation stocks.

However, Wilson believes it’s important to distinguish the reasons for rising yields. If a higher 10-year U.S. Treasury yield mainly reflects stronger nominal economic growth rather than out-of-control inflation, the stock market still has some room to absorb the impact. In that scenario, equities can even continue to provide some inflation hedging effects.

The JPMorgan strategy team, meanwhile, sees oil prices as a key short-term market variable. Further increases in oil prices may push up inflation expectations and further compress stock valuations; if oil price pressures ease, the market may find it easier to digest the impact of rate hikes.

Mislav Matejka, head of equity strategy at JPMorgan, also cautioned that September is historically a relatively weak month for U.S. stocks, and seasonal factors may amplify recent volatility. From a longer-term perspective, however, whether the market can stay strong still depends on the economy and earnings performance, not on single policy events.