LIVE MARKETS-Are higher Fed rates really that bad for equities?

The Federal Reserve is days away from its next interest rate decision, but it's uncertain if it will hike rates or keep them steady, with chances tilted towards an increase.

Typically, higher rates are seen as bad news for equities, but it's not actually that simple, UniCredit investment strategist Tobias Keller pointed out.

"Following the first rate hike after a pause, the S&P 500 typically struggled over the subsequent one to three months as higher rates weigh on valuations, tighten financial conditions and heighten concerns that policymakers may eventually over-tighten," he said.

But, with time, returns tend to improve, Keller added.

Data going back to 1988 shows that in five of the seven 'episodes' - which are defined as the first Federal Reserve rate hike following a period of at least six months without tightening - the S&P 500 was higher six months after the initial hike, Keller found.

"One year later, equities delivered average returns of roughly 8%. The two exceptions, 1994 and 2022, shared a common feature: monetary policy became significantly more restrictive than markets had expected."

So should the Fed start hiking rates soon, investors might be wise not to worry too much about equities.

"Provided the Fed's hiking cycle remains broadly in line with current expectations, and growth and earnings remain resilient, investors should be careful not to confuse short-term volatility with a deterioration in the medium-term outlook for equities," Keller said.