S&P 500 sectors deliver 1.14% monthly returns when rates stay flat

S&P 500 sectors have historically performed best when the Federal Reserve holds rates steady, with technology and energy leading during hiking cycles.

S&P 500 sectors delivered average monthly returns of 1.14% during flat interest-rate environments since 1999, outperforming both rising and falling rate cycles, according to research by Derek Horstmeyer, a finance professor at George Mason University's Costello College of Business.

"Rate cuts may not deliver the outsize returns investors often associate with easier money, while rate increases may further boost the surging tech sector," Horstmeyer said.

The study analyzed nine of 11 S&P 500 sectors using value-weighted SPDR exchange-traded funds dating back to 1999, excluding real estate and communications which became defined sectors in 2015 and 2018, respectively. During rising rate cycles, all sectors averaged 0.76% monthly returns with 17% annualized volatility. Falling rate cycles produced the worst outcomes — negative 0.31% per month with volatility spiking to 23%.

The findings challenge conventional wisdom that cheaper capital fuels growth. Technology, often viewed as dependent on low borrowing costs, delivered 1.24% monthly returns during hiking cycles — second only to energy at 1.31%. Consumer staples and healthcare lagged in rising rate environments at 0.38% and 0.42% per month, respectively.

Materials and Industrials Lead When Rates Pause

Materials topped all sectors during flat rate periods with average monthly returns of 1.52%, followed by industrials at 1.44%. Even the worst performers — utilities and consumer staples — delivered 1% and 1.05% per month, respectively, during these cycles. Volatility for materials reached 20.66% annualized, while consumer staples showed the lowest at 11.52%.

Falling rate cycles delivered the weakest results across all sectors. Healthcare and consumer discretionary led with modest gains of 0.29% and 0.31% per month, while financials and energy posted losses of 1.32% and 1% per month, respectively. Energy recorded the highest volatility of any sector-cycle combination at 32% annualized during declining rate periods.

The research comes as the Federal Reserve has held rates steady since December, with policymakers divided on whether to cut further or resume increases to combat inflation. For investors, the historical data suggests a continued pause could benefit broad market exposure, while hiking cycles favor technology and energy exposure despite the conventional narrative around growth stocks and borrowing costs.

This article is for informational purposes only and does not constitute investment advice.