S&P 500 can withstand 2 Fed rate hikes, RBC says after Warsh hold

RBC Capital Markets says the S&P 500 can weather up to two quarter-point rate increases over the next year if the Fed keeps tightening measured.

The S&P 500 can absorb up to two 25-basis-point rate increases over the next 12 months as long as the Federal Reserve's tightening remains moderate, according to RBC Capital Markets.

"As long as we're talking about two 25-basis-point hikes over the next 12 months, I think equities ultimately will be fine," Lori Calvasina, head of US equity strategy at RBC Capital Markets, said. "Equities seem able to withstand anything that's done in moderation."

The call follows the Federal Reserve's June 17 decision to hold the benchmark rate at 3.5% to 3.75% — the fourth consecutive pause — in Kevin Warsh's first meeting as chair. Half of the 18 FOMC participants now expect at least one rate increase in 2026, with the median dot plot projecting the rate at 3.8% by year-end, 25 basis points above the current range. The S&P 500 has rallied 18% from its March 30 low and posted its 11th weekly gain in 12 weeks through the holiday-shortened trading week.

The resilience matters because the Fed's pivot toward inflation vigilance introduces a new risk for equity valuations. The central bank now sees headline PCE inflation ending 2026 at 3.6%, up sharply from the 2.7% forecast in March, driven partly by rising oil prices linked to the Iran conflict. The 2-year Treasury yield jumped 11 basis points to 4.153% on the decision, while the 10-year yield rose 4 basis points to 4.469%, tightening financial conditions that could pressure rate-sensitive sectors.

The S&P 500's ability to absorb a modest tightening cycle reflects a market that has already priced in a higher-for-longer rate environment, Calvasina said. The benchmark index has gained 10.5% year to date, with the Morningstar US Market Index rising nearly 19% from its 2026 trough. Small-cap stocks have outperformed, with the Morningstar US Small Cap Index up 26.7% over the past 12 months — its best such stretch since 2023.

Rate Sensitivity Creates Sector Divergence

The rate outlook creates a divergent picture across sectors. Home improvement retailers Home Depot and Lowe's both forecast just 1% same-store sales growth for fiscal 2026, with Home Depot Chief Executive Officer Ted Decker citing "low housing turnover" as elevated mortgage rates — the 30-year fixed rate stands at 6.47% — suppress renovation demand. Higher-for-longer rates could further dampen consumer confidence in big-ticket spending, Calvasina noted.

Conversely, sectors with pricing power and domestic revenue exposure may benefit. About 80% of Russell 2000 revenue is generated inside the US, compared with 60% for the Russell 1000, making small caps relatively insulated from the global trade disruptions that have pushed oil prices higher.

This article is for informational purposes only and does not constitute investment advice.