What happens to the S&P if Kevin Warsh hikes rates?

Dumb question, I know. Because Warsh isn’t going to hike rates.

I mean, he might. As I mentioned the other day, it’s possible Scott Bessent can explain to Donald Trump that a one-off hike “today” obviates the need for, or at least materially reduces the odds of, additional hikes “tomorrow.”

Warsh, Bessent and Trump could disingenuously claim that a token, 25bps “adjustment” hike in, say, September, “proves” that no matter what he says publicly (or who he indicts), Trump’s ultimately committed to letting the Fed set rates as it sees fit.

For argument’s sake, let’s say Warsh hikes at least once this year, or maybe twice, consistent with market pricing. What would become of equities, that most sacrosanct of all sacred cows?

History suggests a mild selloff, strong corporate earnings or not. The risks for equities in a Fed-hike scenario may also be higher now than in the past given rich valuations.

Although profit growth “will remain the most important driver of equities… stocks would struggle if the Fed were to proceed with hikes [for] three reasons,” Goldman’s Ben Snider wrote, in his latest.

Fed tightening, he said, “would weigh on the outlook for growth” and considering “the current cycle is particularly capital-intensive,” it’s likely that equities would prove more sensitive to even a modestly higher cost of capital.

In addition, Fed hikes are “one of the conditions that has marked the peaks of past high-valuation, high-concentration rallies that investors often use as analogues for the current bull market,” he continued.

The figure above shows you S&P performance in the six months leading into, and in the 12 months following, the onset of hikes.

During the last seven cycles, the typical S&P decline was 2% after the first Fed hike, with a recovery in fairly short order (four months, give or take).

That’s hardly onerous. But, Snider cautioned that in the event the Warsh Fed hikes (not Goldman’s house view), investors are likely to expect additional tightening.

“In the past few decades, the only instance of a standalone hike was the 25bps increase in March 1997, a preemptive adjustment intended to deter inflation amid a prolonged economic expansion,” he wrote, taking a stroll down memory lane. The figure below shows you that episode.

That’s actually the analogue some prefer for 2026, but if it’s apt, it’s not necessarily a good thing in the near-term for stocks. As Snider recounted, the S&P retreated 10% in the two months “around” that hike.

“Today, even a modest hiking cycle would likely weigh on stocks because it would be difficult for the market to be confident in advance about the duration and magnitude of tightening,” he went on.

Note from the figure that the 1997 episode worked out fine. “As two-year yields peaked, the equity market then stabilized and quickly rose to new highs, with the entire episode lasting just three months,” Snider added.

It’d be another three years before it all fell apart.