The Fed is limbering up its hiking boots, and not every sector is ready for the climb. Futures markets are pricing in ~75% odds of a rate increase by December. New Fed Chair Kevin Warsh's Jackson Hole speech could sharpen that timeline fast.
Sector winners: Barclays data show energy, materials, and technology have historically outperformed during rate-hiking cycles since the mid-1990s, putting them among the strongest sectors to watch today. Energy is already leading the pack, with the Energy Select Sector SPDR ETF up more than 40% this year, driven by ExxonMobil, Chevron, and ConocoPhillips. Barclays strategists call energy “the most resilient beneficiary of the late-cycle backdrop.”
- Freeport-McMoRan, a 2026 Barron's stock pick, is up more than 50% this year and trading at a record high.
- The broader tech sector trades at just 21 times earnings estimates despite an estimated earnings growth rate of 42%, per Yardeni Research.
Markets Build a Cushion
How markets respond will largely come down to how far the Fed goes. JPMorgan Private Bank expects risk assets to hold up if the central bank delivers no more than two hikes. The S&P 500 has already fallen about 4% since rate-hike expectations started building in mid-June, suggesting markets have already absorbed a good part of the impact.
- Fed minutes show more officials favored a July hike than the three who formally dissented, with many signaling support if inflation stays elevated.
- JP Morgan data show the S&P 500 averaged a ~3.3% decline per 25-basis-point hike across the 2018 and 2022 cycles.
Where rates bite: Banks, consumer discretionary, utilities, staples, and real estate tend to struggle as higher rates weigh on valuations and dividend appeal. Barclays warns that financials and traditional defensives “have faced the greatest pressure as tighter financial conditions and rising discount rates weigh on earnings expectations and valuations.” Healthcare is the exception, with Yardeni Research overweight on attractive valuations and improving drug pipelines despite Barclays flagging pullback risk. In a hiking cycle, growth beats yield.