Historical data suggests temporary market dips after September rate hikes

The Federal Reserve raised interest rates at its mid-September meeting, a move that has historically preceded short-term stock market declines. While the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average have held steady in the immediate aftermath, market history indicates that the last two September rate hikes were followed by drops within weeks.

The 2018 cycle offers a clear precedent for temporary volatility. The S&P 500 and the Dow set new record highs on September 20, 2018, six days before the Federal Reserve increased rates. Following that hike, the S&P 500 fell 19.1% until its low point just before Christmas. The Fed raised rates again on December 19, 2018, five days before that low was reached. By one year after the initial hike, however, the S&P 500 had recovered to be up 2.5%, demonstrating that multiple rate hikes did not cause permanent market damage.

The 2022 cycle presented a different challenge for investors. By the time the Federal Reserve raised rates on September 21, 2022, the S&P 500 was already 21% below its January 2022 record high as the hiking campaign weighed on stocks. The market reached its low on October 12 of that year. One year later, the index was 14.3% above its levels on hike day, rewarding those who held through the decline. In this instance, the market largely priced in the headwind from rate hikes in advance.

The current setup differs from both prior cycles, with long bond yields starting from a higher point. According to CNBC, the 10-year Treasury yield climbed back to 5% on September 16, 2026. Treasury data shows this is significantly higher than the approximately 3.1% and 3.5% yields recorded on the dates the Federal Reserve raised rates in 2018 and 2022, respectively. Each additional rate increase now lands on borrowing costs that are already elevated.

Labor market conditions are also weaker than during previous cycles. The Bureau of Labor Statistics reported on October 2, 2026, that employers added only 29,000 jobs in September and that unemployment rose to 4.2%. A Federal Reserve increasing interest rates into a softening job market risks overshooting, though it also has more reason to stop soon.

Stock valuations provide a potential offset to these risks. The S&P 500's forward price-to-earnings ratio stands at 19.2, slightly below its five-year average of 19.8. FactSet projects earnings growth of 29.1% this quarter compared to the third quarter of 2025. This suggests the risk of rate hikes puncturing a frothy market is lower than some fear, although the market remains led by a handful of megacap stocks that are not valued cheaply.

Investors are watching the October 27-28 Federal Reserve meeting for further signals. After the weak jobs report, the CME's FedWatch tool indicates a 20% probability of a rate hike. If the Fed hikes in December while long bond yields continue to climb, stocks and bonds could fall together as they did in 2022. Historical data shows both prior drops proved to be buying opportunities within a year.