I have been counting cutting cycles. The postwar record is clear.
Non-recessionary Federal Reserve cutting cycles are often interrupted. Something always breaks the pattern. An oil shock. An inflation scare. A geopolitical event that forces the Fed's hand. The 2024-2026 cycle is following the script with the Iran war and the oil spike as the catalysts. But in my view, the Fed was done cutting anyway.
I believe there is at least one “insurance” hike (think mid-cycle adjustments) this year. Not a full reversal but a pivot. And it is good news for bulls. The S&P 500 averaged +8.85% in the six months following surgical hikes (based on three verified episodes: 1996-98, 1999, and 2015-16). This is not a typo. The market rallies after the Fed delivers these small, preemptive moves.
Compare this to full hiking cycles. In the six months before the first hike of a full cycle, the S&P 500 averages +7.4%. In the six months after, it averages -0.7%. The market knows the difference. It prices the difference. And it trades accordingly.
Why the divergence? Because insurance hikes are information. They tell the market the Fed is alert and willing to act early. That reduces uncertainty, compresses risk premia, and allows multiples to expand.
Full hiking cycles, by contrast, are admissions of failure. They mean the Fed waited too long. They mean inflation is already entrenched. They mean the economy is running hot enough to require aggressive intervention. The market does not reward this. It punishes it.
So why is a targeted hike coming? The average non-recessionary cutting cycle delivers 80 bps of easing. The current cycle delivered ~170 bps over 19 months, more than double the historical baseline, into a $30 trillion economy growing at roughly 3% annualized. Cutting that deeply into 3% growth is a historical anomaly. Now the bill is coming due. Headline inflation sits at 3.3%. Core runs 2.6%. Oil amplifies both. The Fed cut into strength and now faces a supply shock.
(Source: St. Louis Federal Reserve)
The scale and duration of this cutting cycle aren’t the only story. Credit spreads narrowed, stocks hit higher highs, and fiscal spending increased. That is procyclical stimulus into an economy that did not need it. The labor market printed 4.3% unemployment with low and steady jobless claims. That is not an economy begging for more easing. That is an economy that got it anyway.
The current setup looks like an insurance hike regime. Inflation is elevated but not spiraling. Growth is productivity driven; think AI driving the economy but keeping inflation in check. The labor market found an equilibrium. The Fed has the option to raise 25 bps, maybe 50 bps, and then pause. This is the 1995 playbook. This is the 2015 playbook.
Market Implications are Positive
The market and sector implications differ materially from full cycles.
Financials outperform. Banks benefit from a steeper curve and wider net interest margins. Insurance hikes typically occur when the curve is already steepening, not when the Fed is flattening it aggressively.
Technology holds up. Tech multiples are sensitive to the terminal rate, not the path. Insurance hikes signal a controlled, predictable path. This is better for discount rates than a chaotic cutting cycle or an aggressive hiking cycle. The 1995 and 2015 episodes saw tech lead the market.
Small caps lag. Smaller companies are more sensitive to funding costs. Even 25-50 bps matters at the margin. The Russell 2000 typically underperforms during insurance hike periods.
Defensives underperform. Utilities, consumer staples, and REITs do not need to be owned when the Fed is signaling confidence in the expansion. These sectors work when the Fed is cutting into a recession. That is not the current regime.
Commodities are mixed. Oil and industrial metals depend on the growth trajectory, not the Fed. If insurance hikes succeed in extending the cycle, commodities benefit. If they fail and the Fed is forced into a full cycle, commodities face demand destruction. The base case is modestly positive.
One note of caution: watch duration risk. Today's pause already leaves rates higher than most expected, and mid-cycle adjustments could push them higher still. That creates inherent downward pressure on longer-duration assets. In private markets, the sensitivity can be material: a 25 bps increase in rates produces an estimated 35 bps drag on infrastructure, a 45 bps drag on traditional private equity buyout, and a 65 bps headwind to private real estate over the next 12 months. The growth component of any underlying position needs to clear that hurdle, or the trade doesn't work. (Sources: St. Louis Federal Reserve, NCREIF, Cambridge Associates, ZMSG calculations.)
Conclusion: Be Bullish
The Fed's cutting cycle is finished in my view. The next move will be a 25 bps insurance hike, likely in Q4 2026, with a possible follow-on in early 2027 if inflation does not cooperate.
This is not a bearish development. It is bullish. Targeted hikes are the Fed’s way of extending the cycle, not ending it. The data is unambiguous, and it favors the bulls.
Investors should position for a higher-for longer interest rate regime with small adjustments along the way. Own financials. Own technology. Avoid defensives. Avoid small caps. And do not fear the first hike.
The Fed is not starting a war on inflation. It is sending a postcard. The message: "We are watching. We are ready. Keep calm and carry on."
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