History points to three key takeaways as Fed prepares to hike

Investing.com -- Citi told investors in a note Wednesday that it has drawn three lessons from history for investors as the Federal Reserve is expected to raise interest rates, arguing the move need not end the equity bull market.

The bank's economists expect a hike this week, as part of a broader shift, with more global central banks now tightening than easing for the first time in years. Citi sees further increases from the Bank of Japan and the European Central Bank. It has also penciled in hikes from the Bank of England.

Meanwhile, 10-year U.S. Treasury yields have climbed above 5%.

Looking back to the 1970s, Citi found that "global equities tend to wobble around the start of hikes, while still climbing 6/12m later."

Stocks have risen just one-third of the time in the three months after a first hike, but in the majority of cases 12 months on, up about 7% on average.

"It is not the first Fed hike that ends equity bull markets," with volatility around the first move typically worth buying on a one-year view, even as it has paid to sell Treasuries.

Secondly, "regional rotation favors RoW," with the U.S. consistently underperforming while Japan and Europe outperform, said Citi. The bank added that in emerging markets, Brazil and India tend to lead and China lags.

Third, Citi said investors should lean into value stocks, and more mildly into cyclicals, a rotation that aligns with those regional trends.

The bank concluded that the backdrop argues for short-term caution amid stagflationary risks from geopolitics, but reiterated its call for further earnings-driven gains in global equities to mid-2027.

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