Stocks could be in for big gains ahead if this is the Fed's last rate hike, history shows

Published Wed, May 3 202311:49 AM EDT

History shows that Wall Street could be in for solid gains ahead if the Federal Reserve makes Wednesday's expected rate hike its last. CNBC PRO looked at the last five times the Fed stopped hiking after a series of increases and found the stock market typically showed nice returns 1 month to 12 months later. The S & P 500 averaged an 8% gain and 21% return 3 months and 12 months out from the central bank's final hike in a series. Consensus expectations forecast a quarter percentage point increase to benchmark interest rates from the Federal Reserve Wednesday afternoon. Traders are betting that will be the last hike and the central bank may even cut rates before the end of the year, according to fed funds futures trading. Historically, the S & P 500 has rallied in the ensuing months after a central bank pivot, with the exception of market performance after the burst of dotcom bubble. After the Fed paused rate hikes in May of 2000, the S & P 500 struggled. The benchmark index lost 6.29% one week out from the decision, and was relatively flat one month later. A full year after the 2000 cycle saw the S & P 500 down 12.35%. For today's market to avoid a similar fate as the Dotcom bubble and instead go with the historical positive trend, investors will need to feel comfortable that looming headwinds - further contagion from the regional banking crisis, and a fight in Congress over the U.S. debt ceiling - will abate. And sometimes it can be a while before the rally begins. In June 2006, the central bank's decision to pause rate hikes had a tepid response from markets at the start. The S & P 500 added a mere 0.1% in late July and 0.3% in August. Six months later, however, the index added 11.4% from the pause. One year from the June decision saw a 18.1% gain. December of 2018 saw the S & P 500 rebound 6.53% the following month. When broadening the scope to three and six months out, the benchmark index added 12.9% and 16.7%, respectively. Further back, the S & P 500 was still performing well in response to a pause to central bank tightening. The index added 12.6 and 18.9% three and six months after a Fed pause in March of 1997. One year after the March pause, the S & P 500 had added 35.7%. February of 1995 shows a similar performance, with 9.3% and 18.9% increases to the S & P 500 three and six months after a pause. Still, the central bank could be wary of ending its tightening cycle yet in an effort to tackle still elevated inflation. — CNBC's Fred Imbert contributed reporting