Following the June 10 inflation release, headline CPI rose to 4.2% year-over-year (up from 3.8% the prior month), with energy and fuel costs driving much of the increase. While domestic equities benefited from three 25 basis point rate cuts in 2025, the policy backdrop has shifted, and the new Fed Chair now faces a more complex path in managing inflation going forward.
Following the June 10 inflation release, headline CPI rose to 4.2% year-over-year (up from 3.8% the prior month), with energy and fuel costs driving much of the increase. While domestic equities benefited from three 25 basis point rate cuts in 2025, the policy backdrop has shifted, and the new Fed Chair now faces a more complex path in managing inflation going forward.
As inflation pressures build, markets have begun to price in the possibility of a rate hike later this year. According to the CME FedWatch Tool, implied by Fed funds futures, there is currently a 56.5% probability of a rate hike at the December 9, 2026 Fed meeting as of this writing.
The key question is how equities will respond. Markets tend to react quickly to changes in economic data, and if inflation continues to rise—keeping rate hike expectations elevated—equity markets could face pressure in the months ahead. Higher discount rates would weigh on valuations, potentially leading to weaker returns.
The chart below examines prior rate hike cycles, showing S&P 500 (SPX) forward returns across various time horizons following the initial hike. Several patterns stand out:
- Short-term returns are mixed, with 1-week forward returns averaging 0.09%.
- 1-month and 3-month returns tend to soften, averaging -0.10% and -0.26%, respectively.
- 6-month returns average 3.43%, remaining below long-term historical averages
Taken together, the data suggests that equities may experience some near-term headwinds around the onset of tightening cycles. However, it is important to avoid overreacting. Rate expectations remain fluid and will continue to adjust as new data emerges. Positioning too defensively too early can lead to missed opportunities, especially as domestic equities continue to exhibit underlying strength despite recent short-term volatility.
The State Street SPDR S&P 500 ETF Trust (SPY) sits on two consecutive buy signals, after its latest double top break at $700 in April. SPY maintains a strong fund score of 5.13, with a positive score direction of 0.73. Although the fund did reverse into Os over the past week, this only demonstrates near-term minor weakness, as the weight of the evidence is still overwhelmingly positive. If weakness does occur, the move will be highlighted in the fund score, along with the various other tools available on the platform. Initial support is at $630, with additional strong support $510.
