After the September Fed rate hike was implemented, "where is the endpoint" has become the core question for asset pricing.
Over the past few years, almost every inflection point in A-share style and index levels has had the shadow of US Treasury yields behind it: the 525bp "violent rate hikes" of 2022-23 corresponded to two years of dividend style dominance, the September 2024 rate cut combined with the 924 policy resonance ignited a full-scale bull market, the weak dollar combined with AI industry trends in 2025 spawned a tech growth rally, and the adjustment in tech hardware since the second half of this year has been highly synchronized in timing with the 10-year US Treasury yield breaking above 4.5% and headwinds to the overseas AI narrative.
How will A-shares perform during this rate hike cycle? To answer this, we return to history itself: reviewing 14 rate hike cycles since 1960, examining the historical performance of the US economy, corporate earnings, and equity markets, and combining the unique characteristics of this cycle to project possible paths for A-shares going forward.
What lessons can be drawn from Fed rate hike cycles since 1960?
Since 1960, the Fed has gone through 14 rate hike cycles. Excluding 1997, which involved only a single hike, these can be divided into two categories by policy nature: 7 "preemptive" cycles — where inflation was still low or merely emerging, growth momentum was strong, and the central bank proactively tightened ahead of the curve to anchor expectations; and 6 "anti-inflation" cycles — where inflation had already spiraled out of control, policy was clearly behind the curve, and the Fed was forced into catch-up tightening.
This cycle's inflation increase stems from geopolitical supply shocks, while the growth narrative remains strong, making it more akin to a preemptive cycle in nature.
Following this historical classification, we summarize five key patterns.
First, the baseline scenario for preemptive rate hikes is a soft landing, which has been repeatedly validated throughout history.
Across the 7 preemptive rate hike cycles, the US economy never fell into recession during the hiking period itself. Only the 1999-2000 and 2004-2006 cycles saw recessions emerge 10-18 months after the final hike — the former due to the bursting of the internet bubble, the latter stemming from the subprime crisis and credit contraction triggered by real estate market adjustments.
Mapping this to the current cycle, no recession signals are visible in the US economy: nonfarm payrolls remain resilient, and economic activity has not yet shown systematic weakening. Under the baseline assumption, this rate hike cycle is more likely to bring about a repricing of global asset valuations and styles rather than a recession trade, with relatively limited direct impact on A-share fundamentals.
Second, from a corporate earnings perspective, the negative impact of rate hikes on earnings is lagged, with earnings momentum typically peaking only in the latter stage of the hiking cycle.
Historically, S&P 500 earnings (referring here to inflation-adjusted TTM earnings per share, i.e., real EPS) all achieved positive growth during preemptive rate hike periods: earnings grew at roughly 10% year-over-year in 1963-1965, accumulated approximately 23% growth in the mid-strong recovery of 1983-1984, about 39% in 1994-1995, and about 42% in 2015-2018.
In terms of timing, during preemptive rate hike cycles, the peak in year-over-year earnings growth occurred on average at approximately 72% through the hiking process, significantly later than the roughly 38% mark in anti-inflation rate hike cycles.
For the current cycle, the market's core concern remains on tech earnings and the supporting A-share supply chain. We believe it is premature to be overly pessimistic about the industry boom itself in the near term. First, based on historical experience, corporate earnings tend to remain resilient in the early stages of preemptive rate hikes, and rising rates do not mean earnings will immediately reverse downward. Second, the market currently expects North American cloud providers' Capex growth to peak around 2026Q4, but AI capability improvements and new scenario expansion are nonlinear; for CSPs, seizing the AI wave has existential strategic significance, making it difficult for them to voluntarily slow down due to short-term rate hikes or market skepticism — capital expenditure pace is ultimately determined by industry supply and demand, and it is still hard to conclude that it will weaken "next year." Third, from a performance realization perspective, even if capital expenditure growth gradually slows, the order backlog, project delivery, and revenue recognition formed by earlier capital expenditures, along with expanding inference demand and tight memory supply-demand conditions, may still support upstream hardware earnings release. Therefore, the AI hardware supply chain's earnings support remains in place for the foreseeable future.
Third, liquidity tightening will almost inevitably manifest on the denominator side of assets — that is, valuation digestion is unavoidable.
From experience, rate hike cycles tend to accompany increased attractiveness of dollar assets and global liquidity reallocation, and even US equities struggle to withstand the valuation pressure from rising rates. Of the 13 rate hike cycles since 1960, 10 saw S&P 500 valuations decline: among the 7 preemptive cycles, 6 saw PE (TTM) decline, with a median decline of 17.2%; among the 6 anti-inflation cycles, 4 saw PE (TTM) decline, with a median decline of 7.7%. Among these, the 1973-1974 rate hike cycle, hit by stagflation, saw PE (TTM) maximum drawdown reach 40.5%. The few cycles where valuations rose rather than fell, such as 1980-1981 and 2022-2023, saw PE (TTM) increase by 5.7% and 10.4% respectively, mainly related to contemporaneous earnings contraction and passive valuation elevation.
Mapping this to A-shares in the current cycle, we believe valuation pressure from overseas liquidity tightening is similarly difficult to fully immune against. This means that sectors with insufficient earnings realization and relatively elevated valuations may face more pronounced valuation digestion pressure; in an environment of constrained valuation expansion, subsequent excess returns are more likely to depend on numerator-side earnings realization.
Fourth, from an asset performance perspective, US equities under earnings support typically follow a "digest first, recover later" pattern, while Asia-Pacific markets' high-beta attribute manifests more as amplified volatility rather than trend-based pressure — most rate hike cycles still offer positive returns or阶段性 recovery opportunities for equity assets.
For US equities, at 1/3/6 months after the first rate hike, the median cumulative S&P 500 return under preemptive hikes was -0.8%/-1.3%/+8.3%, with mild digestion in the first 3 months and recovery into positive territory by month 6; under anti-inflation hikes, it was +1.4%/-2.4%/-2.1%, with weakness concentrated in the 3-6 month window. Extended to the full cycle, the gap in cumulative returns between the two hiking scenarios is not large — the difference lies mainly in the process and tail risks: during anti-inflation rate hike cycles, there were two instances of declines exceeding 20% (1973-74 range of -24.9%, 2022-23 maximum drawdown of -22.8%), both corresponding to aggressive tightening under runaway inflation.
For Asia-Pacific,阶段性 recovery opportunities also exist during rate hike cycles, and market performance does not entirely follow US equities — it is also influenced by local economic cycles and policy environments. For example, during the Fed's consecutive rate hikes in 2004-2006, Japan's economy gradually emerged from adjustment, with the Nikkei 225 rising over 40% in 2005, significantly outperforming US equities during the same period. Overall, the Nikkei's median cumulative return during complete preemptive/anti-inflation rate hike cycles was +13.0%/+29.6%, while the Hang Seng Index's was +15.9%/+20.9%. However, the high-beta attribute also means greater volatility during downturns — the Hang Seng Index saw a maximum drawdown of 81.9% during the 1973-1974 rate hike cycle, significantly higher than the S&P 500's 24.9% during the same period.
Since the rate hike cycle began in September, the Shanghai Composite, Hang Seng Index, and Nikkei have all underperformed the S&P 500 to date, reflecting Asia-Pacific markets' higher volatility elasticity under overseas liquidity tightening. But this does not mean the subsequent recovery will necessarily lag behind US equities. Looking ahead, the timing of Asia-Pacific recovery depends on Fed policy expectations externally and the resonance of fundamentals, earnings, and policy domestically.
Fifth, in terms of time dimension, from the first rate hike to the peak in 10Y US Treasury yields, only the 1999-2000 cycle (about 7 months) was under 9 months among the 13 historical rate hike cycles; the other 12 all exceeded 9 months, with a median of about 19 months (14 months for preemptive, 19 months for anti-inflation), and the more anti-inflation-oriented the cycle, the more delayed the peak.
This rate hike cycle began in September. Based on historical rhythm, the 10Y yield peak is expected to still be some time away; considering the stage where policy rates stagnate at high levels after hikes, a substantive improvement in liquidity will most likely have to wait until 2027H2.
Scenario analysis for the current rate hike cycle
This rate hike cycle has certain special characteristics and complexity, with no ideal historical comparable: first, the starting rate level is relatively high — the Fed only cut rates three times shallowly before hiking, pivoting back to tightening without sufficient easing; second, inflation is driven by geopolitical supply shocks, making policy prone to dilemma; third, AI capital expenditure is deeply tied to financing conditions.
Considering the significant uncertainty still surrounding oil prices, US political situation, and policy direction going forward, we break down the market outlook for the next year into four scenarios (subjective probabilities in parentheses):
Baseline scenario (about 50%) — After one more 25BP hike in December, the Fed enters an observation period, with about 2 more hikes still possible in 2027; inflation slowly declines but the central level remains elevated; US Treasury yields oscillate at high levels. AI capital expenditure resilience remains, but rising financing costs combined with US political turmoil and regulatory uncertainty cause the overseas AI narrative to cool marginally; A-share indices show resilience but valuation expansion space is constrained, dominated by structural opportunities, with value and dividend styles relatively advantaged, and the AI domestic supply chain expected to strengthen through self-controllable logic and welcome structural recovery opportunities; Hong Kong stocks more constrained by overseas liquidity.
Rate hikes weaker than expected (about 25%) — Inflation falls faster than expected, energy central level shifts down, and the Fed pivots to easing early in 2027; US Treasury yields trend downward, the dollar weakens, and risk appetite recovers. AI financing pressure eases, the overseas AI narrative repairs, and A-share tech growth is expected to see valuation recovery, with industry trends and earnings improvement resonating; Hong Kong stocks show greater elasticity.
Rate hikes stronger than expected (about 20%) — Inflation stickiness exceeds expectations, oil prices remain elevated, rate hikes exceed expectations, and policy remains relatively tight in 2027; long-end yields rise further, the dollar strengthens, and risk assets come under pressure. Rising financing costs suppress AI capital expenditure expectations, and sentiment from overseas AI hardware chain adjustments may transmit to A-share tech sectors with increased volatility; domestic policy hedging strengthens, with dividend, low-valuation, high-cash-flow directions relatively advantaged, and domestic substitution and domestic demand areas showing relative resilience.
Tail scenario (about 5%) — Runaway inflation forces aggressive rate hikes, or AI capital expenditure significantly contracts and the industrial chain investment cycle reverses, triggering recession, with global risk appetite declining markedly. AI industrial chain earnings expectations are revised down, becoming the main drag on A-shares, with both independence and earnings resilience facing tests; defensive assets relatively advantaged, with recovery awaiting improvement in macro and earnings expectations.
Summary and outlook
In summary, reviewing Fed rate hike cycles since 1960 yields five insights: first, the baseline scenario for preemptive rate hikes is a soft landing, with limited recession risk; second, earnings damage is lagged, with earnings momentum in preemptive rate hike cycles typically peaking in the latter stage, so it is premature to be overly pessimistic about the industry boom itself in the near term; third, tightening inevitably manifests as denominator-side valuation pressure, so avoid "weak earnings, high valuation" directions in allocation; fourth, US equities follow a "digest first, recover later" rhythm, while Asia-Pacific high-beta amplifies volatility but is not under pressure most of the time; fifth, the 10Y US Treasury yield peak lags the first rate hike by basically over 9 months in all cases, and this cycle's substantive liquidity improvement may have to wait until 2027H2.
This cycle lacks an ideal precedent due to the relatively high starting rate level, imported inflation, and AI capital expenditure deeply tied to financing. In terms of scenarios: baseline scenario (about 50%) — A-shares resilient but valuation expansion constrained, dominated by structural market, with value and dividend advantaged and AI domestic chain having recovery opportunities; rate hikes weaker than expected (about 25%) — tech growth sees valuation recovery; rate hikes stronger than expected (about 20%) — volatility increases, dividend defense advantaged; tail scenario (about 5%) — AI earnings downgrades drag the market.
Short-term market may remain range-bound. In terms of rhythm, the next 1-2 weeks are event-heavy, with the APEC meeting, Anthropic IPO, Jensen Huang's closed-door briefing, and Warsh's confirmation hearing all potentially bringing volatility — we recommend focusing on capturing structural opportunities.
In terms of specific directions: tech hardware overseas chain sentiment is relatively weak, mainly due to global AI narrative repricing after the Jensen Huang departure controversy, compounded by US AI hawks controlling the narrative, damaging the overseas chain's short-term logic; but the situation is not yet settled, and the possibility of a reversal cannot be ruled out — we recommend waiting and seeing; after the "blue wave," the domestic chain logic strengthens, and we continue to favor recovery opportunities. The first collective divergence in AI application end is more of a trading-level phenomenon, with the industry narrative not broken — we recommend continued attention. In the medium term, continue to watch low-position fundamentally bottoming varieties (military, domestic demand such as baijiu); high-dividend, high-free-cash-flow dividend assets remain the decisive factor for absolute returns.
Risk warnings: Fed rate hike magnitude or path guidance exceeding expectations; technological innovation falling short of expectations; geopolitical risks; Trump administration policy uncertainty; domestic economic recovery slower than expected, etc.
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