Investing.com -- BCA Research told clients in a note that the Federal Reserve’s return to rate hikes is unlikely to derail U.S. stocks. It pointed to history showing the S&P 500 has gained over every full Fed tightening cycle since 1980.
"The Fed’s first hike is unlikely to be an equity-market cliff," strategists Noah Weisberger and Yifei Liu wrote in a note.
The Fed raised rates last week. BCA expects a shallow cycle, with one or two more 25-basis-point increases. The firm said that path is already largely priced into longer-dated Treasuries. It added that the drop in valuations over recent months has absorbed some of the rate shock.
BCA looked at seven hiking cycles since 1980. In each, the S&P 500 tended to pause after the first hike but still gained over the full cycle, with returns of 4.4% to 28.4%. The index peaked anywhere from six months to nearly three years after the Fed started raising rates.
"Hiking cycles in and of themselves have not typically signaled the end of a bull market, quite the contrary," the strategists wrote.
However, BCA warned that heavy spending on AI adds rate risk. That risk is greatest for companies that rely on outside financing, carry high debt or depend on profits far in the future.
The firm recommends a long/short Quality Capex Basket. It buys stocks with high capital spending, strong earnings growth, solid cash flow, low valuations and low rate sensitivity, and bets against stocks with the opposite traits. BCA set a 10% return target and a 5% stop loss.
BCA kept its year-end S&P 500 target of 8,100.