As the Federal Reserve prepares to steadily raise rates over the next two years, these Dow stocks could win big based on their performance during past rate-hiking cycles. The Fed approved a quarter-point rate hike on Wednesday , marking its first increase since 2018, and signaled that six more are ahead this year as the central bank looks to fight rising inflation, which hit a 40-year high in February. The central bank expects to increase rates three more times in 2023. As the markets digest the news, CNBC Pro looked at the Dow's top performers during three previous rate-hike cycles. The findings could offer clues as to which companies will offer the biggest returns in the years ahead. To determine the top performers, CNBC Pro used FactSet data to find the average annualized returns of Dow stocks when the Fed did a series of rate hikes between December 2015 and December 2018, June 2004 and June 2006, and June 1999 and May 2000. The screen excluded some technology companies that posted extreme returns between 1999 and 2000 that skewed their averages. Here are the five best-returning stocks during those periods, on average: Source: FactSet UnitedHealth Group topped CNBC's list with the greatest average annualized return of 24.1% during recent cycles. The health insurance company's stock has climbed nearly 6% this month, although it is flat year-to-date. UnitedHealth saw a 28.1% return — the largest among the top five performers during the most recent cycle. American Express and Goldman Sachs also made the list, and are poised to benefit from charging higher rates on cards or loans amid the cycle. On average, their stocks boasted a 13.9% and 15.1% annualized return, respectively. Some analysts echo the sentiment that card issuers are a worthwhile investment. Bank of America on Thursday reiterated its buy rating on credit card issuers including American Express and Capital One . The firm expects the stock group to outperform as "the macro overhang eases" and said its 2022 forecasts for statistics like GDP growth (3.3%) and unemployment (3%) could offer a "relatively benign or even favorable backdrop for card issuers." The bank lowered price targets on some card companies but raised American Express to $206, which represents a potential 14% return based on Wednesday's close price. American Express shares are up nearly 13% this year, but down 5% since the start of March. Shares of Home Depot — which saw a 12.7% average annualized return during rate-hiking cycles — are down nearly 20% this year but up 5% this month. The home improvement retailer benefited from surging demand during the early pandemic but is facing pressure from supply chain bottlenecks and inflation. Home Depot reported quarterly earnings in February that beat analysts' expectations on the top and bottom lines. Retailers may tend to do well during rate-hiking cycles because those are typically periods of strong economic activity as well.
Dado Ruvic | Reuters
As the Federal Reserve prepares to steadily raise rates over the next two years, these Dow stocks could win big based on their performance during past rate-hiking cycles.