TLDR
- Citi strategists say global stocks can keep rising through mid-2027, driven by earnings growth
- The Fed is expected to hike rates Wednesday for the first time in three years, with 92% market odds
- Bitcoin dropped 2% to $75,000 after the Senate failed to pass the Clarity Act crypto framework
- Oil prices above $100 per barrel are stoking inflation fears and weighing on bonds
- Citi data shows global equities average roughly 7% gains 12 months after the first Fed rate hike
Citi strategists say they still expect global stocks to rise through mid-2027, even as central banks around the world shift back to raising interest rates. The call is based on earnings growth holding up, with the bank pointing to historical data showing equities tend to recover after early rate hike volatility.
The Federal Reserve is widely expected to raise rates on Wednesday for the first time since it began cutting nearly two years ago. Traders put the odds at 92%, according to CME Group. Fed Chairman Kevin Warsh is set to hold a press conference after the decision.
What History Shows About Fed Rate Hikes and Stocks
Citi looked at every Fed hiking cycle back to the 1970s. In the three months after the first hike, stocks rose in only about one-third of cases. But 12 months later, equities were higher in the majority of cycles, averaging around 7% gains.
The bank also found that the U.S. market tends to underperform after the first hike. Developed markets outside the U.S. have outperformed by 5% to 10% on average a year out, with Japan and Europe among the stronger performers.
Value sectors and cyclicals have also tended to do better than growth and defensive stocks in those periods, based on Citi’s analysis.
The rate hike picture is not limited to the U.S. Citi economists expect the Bank of Japan to hike this week as well. They have also added two more rate increases to their European Central Bank forecast and now expect two hikes from the Bank of England.
For the first time in years, the number of global central banks hiking exceeds those cutting.
The 10-year U.S. Treasury yield has climbed above 5%, its highest level since the financial crisis. Citi says equities can handle higher yields as long as economic growth stays resilient and inflation continues to ease.
Oil prices are also a factor. Both Brent and West Texas Intermediate futures remain above $100 per barrel. Citi’s rates strategists say oil prices are a key near-term driver of the yield curve.
Crypto Drops After Senate Fails on Clarity Act Vote
U.S. stocks edged higher in premarket trading on Wednesday, with the Nasdaq up 0.4%. But they had closed lower on Tuesday as the bond sell-off weighed on sentiment.
Bitcoin fell 2% to around $75,000 after the Senate failed to pass a key procedural vote on the Clarity Act, a proposed regulatory framework for digital assets.
Rising oil prices are adding to concerns that inflation will stay high, which could complicate the Fed’s path forward.
Citi maintains its call for further earnings-driven gains in the MSCI All-Country World Equity Index through mid-2027. The bank does flag growing risks, including geopolitical threats and what it described as growing market exuberance.
August retail sales data is also due Wednesday, expected to show a pickup, while the housing market index is forecast to cool as mortgage rates rise.
The rate decision, dot plot release, and Warsh’s press conference will be the key events for markets before the close.
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