To The Moon

Over the past 15 months, the Federal Reserve has rapidly tightened credit conditions in an effort to reduce inflation. Since March 2022, the Fed has raised the federal funds rate — a benchmark that affects rates across the economy, such as those on bank loans and credit cards — by 5%, the highest rate since the early 1980s. The most aggressive hike ever.

Discussing the state of the economy last week, JPMorgan Chase & Co. CEO Jamie Dimon candidly told the Fed to "pause" rate hikes, but he also said people should brace for a slight increase in rates. Regardless, Dimon thinks the Fed is approaching the end of its rate-hike cycle, which is good news for investors.

The question now is how will the US stock market react if the Fed ends its rate hikes?

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History tells us the stock market can skyrocket

Since 1970, the Fed has experienced 11 interest rate hike cycles, and the S&P 500 has returned an average of 14.8% in the subsequent 12 months. Of course, past performance is never a guarantee of future earnings, but at least the message from history is crystal clear that stocks are likely to soar once the Fed wraps up its current rate-hiking cycle.

Why is this so? The effect of rising interest rates on the economy is contractionary. Once this contractionary stimulus stops, investors will be more willing to put money into the stock market, which in turn will push the S & P 500 index higher.

Investors Should Consider S&P 500 Index Funds

$Vanguard S&P 500 ETF(VOO)$ tracks the 500 largest listed companies in the United States. Its constituent stocks include value stocks and growth stocks from all 11 major sectors, with a high degree of diversification. Buying the Vanguard S&P 500 ETF is equivalent to buying the U.S. economy.

According to Dimon, the United States is the largest and most innovative economy in the world, with 8 of the world's 10 largest companies being American. The weighted percentages of these U.S. companies in the Vanguard S&P 500 ETF are as follows:

$Apple(AAPL)$ : 7.2%

$Microsoft(MSFT)$ : 6.5%

$Alphabet(GOOG)$ : 3.4%

$Amazon.com(AMZN)$ : 2.7%

$NVIDIA Corp(NVDA)$ : 1.9%

$Berkshire Hathaway(BRK.B)$ : 1.7%

$Meta Platforms, Inc.(META)$ : 1.5%

$Tesla Motors(TSLA)$ : 1.3%

Based on historical data, the S&P 500 is likely to rise about 15% after this cycle of rate hikes. Still, the real reason investors buy the $Vanguard S&P 500 ETF(VOO)$ is its long-term earning power. The index has weathered multiple bear markets and recessions over the past 30 years, but still has a total return of 1,600% (9.9% per annum) over that period.

According to this rate of return, if you regularly invest $150 in $Vanguard S&P 500 ETF(VOO)$ every week, your total investment will reach $123,700 after 10 years, $441,700 and $1.3 million in 20 and 30 years, respectively.

There is no absolutely safe investment product in the stock market, but the $Vanguard S&P 500 ETF(VOO)$ is infinitely close to this goal, which is the core reason why investors should consider buying this index fund.