Socit Gnrale offers a "hawkish forecast + bull market antidote": The Federal Reserve is expected to raise interest rates three times, but historical patterns suggest buying the dip in the U.S. stock market.

After Federal Reserve Chairman Kevin Walsh delivered a hawkish speech at the Jackson Hole global central bank conference, France's Industrial Bank officially raised its forecast for the Fed's interest rate path, becoming one of Wall Street's most aggressive investment banks. As the countdown to the Feds September policy meeting begins, Societe Generale expects the Fed to raise interest rates three times in September, December, and March 2027, each by 25 basis points. However, Societe Generale's U.S. equity strategist Manish Kabra paired this hawkish prediction with a "bull market antidote": historical patterns suggest that investors should buy during any market weakness triggered by Fed interest rate hikes. "Stubborn" Inflation: Three Major Drivers Behind Societe Generale's Shift to Hawkish Stance The bank elaborated on three core drivers that prompted its shift from "pausing rate hikes" to "supporting rate hikes" in its report. First, core inflation remains persistently above pre-pandemic levels. Core Personal Consumption Expenditures (PCE) inflationespecially in the services sectorhas not yet fallen to pre-pandemic lows, remaining structurally elevated. Second, the dual impact of rising oil prices and tariffs. The war in Iran has pushed oil prices back above $90 a barrel, compounded by new tariff policies from the Trump administration, collectively driving up price increases. Third, Walsh's hawkish remarks at Jackson Hole. The bank emphasized that Walsh "acknowledged growing concerns over persistently high inflation" during his speech, marking a shift in the Fed's policy considerations from "maintaining a pause in rate hikes" to "tightening again." The CME FedWatch Tool shows that the market is currently pricing in a roughly 60% probability of a rate hike in September, with two rate hikes before December being the most likely outcome. Market expectations have begun to resonate with Societe Generale's hawkish stance. The report states: "Given the persistent risk of inflation and the Fed's growing concerns about high inflation, the necessity to maintain rates at their current level is diminishing. It is time to pivot toward supporting rate hike expectations." The S&P 500 has been significantly revalued but has not fully priced in the risks. However, historical patterns indicate buying opportunities. Facing the impending rate hike cycle, Societe Generale's chief U.S. equity strategist Manish Kabra presents a seemingly contradictory yet crucial judgment: investors should not panic but rather view any market weakness triggered by rate hikes as a buying opportunity. Kabra's core argument is based on two key pieces of data. Firstly, the S&P 500 index has "discounted" about 15% ahead of timeits expected price-to-earnings ratio has dropped from 23.5 times to about 19.5 times. This indicates that the market has partially absorbed the risks of the Fed restarting rate hikes. However, Kabra simultaneously warns that the market has not fully reflected the total impact of the "new round of rate hike cycles." Historical Patterns: Average Drop of 3% in the First Month, Average Rise of 4% After Six Months Kabra's analysis of historical data provides investors with a clear timeframe: within a month after the first rate hike, the S&P 500 index averages a decline of 3%; within six months after the first rate hike, the index averages a rebound of 4%. From the first rate hike to the last, the S&P 500 has recorded positive annualized returns in each complete tightening cycle, ranging from 0.1% to 7.8%, with a median increase of 5.6%. Kabra states: "After the Fed reinstates its tightening policy, the stock market typically exhibits weakness in the following 1 to 3 months, but after six months, the market often rebounds to new highs." Yield Curve Inversion: The "Key Signal" for Success or Failure Kabra emphasizes a critical exception to historical patterns: when the yield on 2-year U.S. Treasury bonds exceeds that of 10-year bondsindicating the yield curve is invertedthe stock market has historically experienced declines of about 20%. Societe Generale's core judgment is that, in most scenarios, yield curve inversion will not occur. As long as this premise holds, "no inversion of the curve = buy during the mid-cycle rate hike." Kabra summarizes this in the report as "the curve rules"the key indicator of whether policy will be "tightened" is the shape of the yield curve, not the valuation itself. The "Exception" of 2022: When Tightening Comes Too Fast Kabra specifically points out that 2022 was an exception to this historical patternduring that time, the Fed implemented extremely aggressive tightening in a short period, and the stock market struggled to digest such extensive tightening, coinciding with yield curve inversion, which prevented the market from bouncing back within six months as expected. However, Societe Generale forecasts that, in most scenarios, the current rate hike cycle will not see yield curve inversion. This means that the strategy of "no curve inversion = buy into rate hikes" remains applicable in the current cycle. Nonetheless, Societe Generale believes that the current situation is fundamentally different from 2022: the Fed is adopting a "cautious rate hike strategy," raising rates three times within six months, allowing policymakers to monitor the impact of rate hikes on economic activity. Kabra's core point can be summarized in one sentence: do not panic due to Fed rate hikes; instead, build positions when the market drops in response to rate hike expectations. Historical data shows that the first 1 to 3 months after starting a rate hike cycle is a "digestion period," but it is also the best window for buying. As long as the yield curve maintains a normal shape, the market is likely to reach new highs six months later.