What Happens to Stocks After the Fed's First Rate Hike: Every Cycle Since 1994, and Where 2026 Fits

The Federal Reserve raised interest rates on September 16, 2026 for the first time since 2023, and the minutes released this week say most officials expect another increase by year end. The natural question is what the stock market does after the Fed starts hiking. We measured it: the S&P 500 after the first rate hike of every tightening cycle since 1994, the year the Fed began announcing its decisions.

The short version. The first month after a first hike has been a losing one in five of six cycles, with a median drop of 3.1%. Twelve months later the index was higher in four of six, with a median gain of 6.3%. And in every cycle, without exception, the market suffered a drawdown of at least 7% at some point in the following year, median 11.4%. Three weeks into the 2026 cycle, none of that has happened yet.

Why start in 1994

Before February 1994 the Fed did not announce changes to its policy rate; traders inferred them from money-market operations. The February 4, 1994 increase was the first the Fed announced publicly, which makes it the first clean starting line. Since then there have been six tightening cycles, counting 1997's single increase, and now a seventh. The dates below are the first hike of each.

What the S&P 500 did after each first hike

Returns are measured from the close the day before the hike, using daily S&P 500 closing prices from Yahoo Finance. Drawdown is the largest peak-to-trough fall on closing prices within the following twelve months.

• February 4, 1994 (3.00% to 3.25%): one month -3.3%, three months -6.0%, twelve months -0.4%. Worst drawdown -8.7%, bottoming April 4, 1994. The bond market crash year; stocks went nowhere for twelve months.
• March 25, 1997 (5.25% to 5.50%): one month -3.2%, three months +12.4%, twelve months +39.3%. Worst drawdown -10.8%, on October 27, 1997, the Asian crisis day. A single hike into a strong economy, and the best outcome in the set.
• June 30, 1999 (4.75% to 5.00%): one month -1.7%, three months -5.1%, twelve months +7.6%. Worst drawdown -12.1%, bottoming October 15, 1999, before the final leg of the dot-com run.
• June 30, 2004 (1.00% to 1.25%): one month -3.0%, three months -1.9%, twelve months +4.9%. Worst drawdown -7.2%, in April 2005. Seventeen consecutive quarter-point hikes followed and stocks ground higher anyway.
• December 16, 2015 (0.25% to 0.50%): one month -8.0%, three months -0.8%, twelve months +10.5%. Worst drawdown -12.0%, bottoming February 11, 2016. The sharpest first month in the set, driven by oil and China fears, fully recovered within three months.
• March 16, 2022 (0.25% to 0.50%): one month +3.1%, three months -14.0%, twelve months -7.1%. Worst drawdown -22.8%, bottoming October 12, 2022. The only cycle where the first month was positive, and the only one that ended the year in a bear market.

The medians, and what they mean

• One month after: median -3.1%, higher in 1 of 6.
• Three months after: median -3.5%, higher in 1 of 6.
• Six months after: median +4.3%, higher in 4 of 6.
• Twelve months after: median +6.3%, higher in 4 of 6.
• Worst drawdown within twelve months: median -11.4%, never shallower than -7.2%.

Read together, the pattern is a stumble, then a recovery, with a double-digit scare somewhere in between. The first hike is usually a confirmation that the economy is strong enough to take it, which is why the twelve-month record leans positive. The scare comes from the market repricing how far the Fed will go. 2022 is the outlier that matters: the one cycle where the Fed was hiking to catch up with inflation rather than to lean against growth ended with a bear market.

Where 2026 sits

The September 16 hike took the range to 3.75% to 4.00%. Sixteen trading days later the S&P 500 is up 2.8% from the pre-hike close, and its worst drawdown since the hike is 1.5%. That is the best start of any cycle in the set. Only 2022 had a positive first month, and 2022 is the cycle nobody wants to repeat.

Two things make 2026 look more like 2022 than like 1997 or 2004. First, the reason for the hike: the minutes say inflation "remained elevated" after "more than five years" above target, and most participants expect another increase. That is a catch-up hike, not a growth hike. Second, the ten-year Treasury yield is above 5% and, by the minutes' own account, rose about 35 basis points in the weeks before the September meeting, which is the bond-market repricing that produced the 1994 and 2022 drawdowns.

Two things make it look better. The market is at a record high with earnings expected to grow 29% in the third quarter, which was true in 1997 and 2004 and not in 2022. And the first month has not been negative, which has only happened once before. Whether the stumble has been skipped or merely delayed is the question the October 27 to 28 meeting and the November 3 midterms will answer. The guide to how interest rates affect your portfolio covers the mechanics behind all of this.

What a rules-based trader does with a six-cycle sample

Six cycles is a tiny sample. It cannot tell you what November will do. It can tell you what to be prepared for, and that is where it earns its keep.

• Expect the drawdown. Every first hike since 1994 was followed by a fall of at least 7% within a year, median 11%. If an 11% drop in the index would force you to sell, your position sizes are wrong for the cycle, record high or not.
• Define the exit before the scare. The drawdowns bottomed on single days (October 27, 1997; February 11, 2016; October 12, 2022) and recovered fast. A stop-loss placed in advance gets you out on the way down at a known cost; a decision made on the day gets you out at the bottom.
• Favor what rising rates favor. The sectors that have historically held up when the Fed tightens are covered in our guide to sectors in a rising-rate world. Rotation beats prediction when the sample is six.
• Do not trade the median. A median of +6.3% over twelve months hides a range from -7.1% to +39.3%. Any rule you build on this should survive the 2022 path, which is what a backtest is for.

If you would rather have the stop and the sizing enforced for you, that is what JorgAI does in the brokerage account you already have: your rules, placed and watched automatically. You can set them up in a few minutes.

Quick answers

What happens to stocks after the Fed raises rates? After the first hike of each cycle since 1994, the S&P 500 fell a median 3.1% in the first month, then was higher twelve months later in four of six cycles, median gain 6.3%, with a drawdown of at least 7% somewhere in between every time.

Is a rate hike bad for the stock market? Usually for a month, not for a year. The exception was 2022, when the Fed was hiking to catch up with inflation and the index ended twelve months lower.

How is 2026 different? Stocks are up 2.8% three weeks after the September 16 hike with a drawdown of only 1.5%, the best start in the set. But the hike was made to fight inflation that has run above target for five years, which is the 2022 profile, not the 1997 one.

When was the first Fed rate hike of each cycle? February 4, 1994; March 25, 1997; June 30, 1999; June 30, 2004; December 16, 2015; March 16, 2022; and September 16, 2026.

How we calculated this

Daily S&P 500 closes from Yahoo Finance, 1949 to October 7, 2026. Each cycle's base is the close on the last trading day before the hike. One-, three-, six- and twelve-month returns use the close on or before the same calendar day that many months later. Drawdown is the largest peak-to-trough decline on closes from the hike date through twelve months later. First-hike dates are the Federal Reserve's announced decisions; the cycle list matches CME Group's count of six cycles from 1994 to 2022. Price returns, dividends excluded.

This article is education, not investment advice. Six cycles is a small sample, and past patterns do not predict future returns.