The Federal Reserve has resumed raising rates, and BlackRock says that alone does not determine whether stocks and bonds will fall next.
In its latest report, BlackRock said the Fed lifted the target range for the federal funds rate by 25 basis points to 3.75%–4.00% in September, the first increase since July 2023. The firm pointed to three main reasons behind the move: inflation remains above target, higher energy prices have added fresh pressure to prices, and the U.S. labor market is still holding up.
That backdrop, in BlackRock’s view, leaves the Fed with room to keep pressing inflation lower without having to immediately worry about a clear deterioration in growth and employment. For investors, though, the more important question is whether a renewed rise in rates means stocks and bonds must decline. BlackRock’s answer: not necessarily.
A first rate hike has not historically guaranteed losses
Markets often treat rate hikes as a negative signal. Higher rates can raise corporate funding costs and weigh on equity valuations. At the same time, rising bond yields can push down the prices of existing bonds.
BlackRock said the historical record is less direct than that simple view suggests. Looking at seven Fed hiking cycles since 1983, the firm found that in the 12 months following the first rate hike, U.S. stocks rose 4.7% on average, U.S. bonds gained 3.07%, and high-yield bonds returned 4.68%.
That does not mean rate hikes are bullish by themselves. BlackRock’s point is narrower: one hike does not decide the direction of asset prices over the next year. The Fed usually raises rates when the economy is still relatively strong. If earnings continue to grow and the labor market does not weaken sharply, economic momentum can offset part of the pressure created by higher rates.
So the key issue is not whether a hike is good or bad in the abstract. It is why the Fed is hiking, and whether the economy can absorb higher borrowing costs.
Higher rates also improve the income case for bonds
BlackRock said one major difference in the current setup is that bonds now offer meaningfully higher income than they did in prior years. Higher risk-free rates and real yields have made the starting point for fixed income more attractive.
In practical terms, rising rates may hurt the price of bonds already in the market, but they also allow new buyers to lock in higher yields. That is why BlackRock does not view a high-rate environment as purely negative for fixed income.
The firm said it currently prefers higher-quality credit, including investment-grade bonds and better-quality high-yield debt. It also emphasized earning returns through coupon income rather than leaning too heavily on a rebound in bond prices.
Still, BlackRock cautioned that heavy issuance of U.S. Treasuries and corporate bonds could keep pushing long-term yields higher. For that reason, it said investors should not simply bet on a rapid drop in long-end rates and instead need to manage duration more flexibly.
The report also noted that long-term real yields are already at elevated levels. BlackRock said the real yield on 30-year U.S. Treasury Inflation-Protected Securities, or TIPS, has moved above 3%.
That means long-dated bonds are starting to offer relatively meaningful real income even without a large price rally.
For U.S. equities, rate volatility matters more than the level alone
Stocks face a more complicated set of variables than bonds. BlackRock remains relatively constructive on U.S. equities, citing still-solid corporate earnings and historical data showing that the first Fed hike has not automatically triggered a down cycle for stocks.
According to the firm, the S&P 500 has generally tended to rise in the 12 months after the first hike across the past seven tightening cycles.
But BlackRock attached an important condition to that view: rates cannot swing violently. Markets can adapt over time to a higher but stable rate environment. If investors come to believe policy rates will stay around 4% for a period, that level can gradually be reflected in equity valuations and corporate financing costs.
The bigger problem comes when markets keep repricing how high rates may ultimately go. If inflation repeatedly surprises to the upside, investors may keep lifting their expectations for future rates. If long-term Treasury yields then rise quickly, equity valuations may need to be reset again and again.
That is why BlackRock said its main concern is not simply whether rates are high, but whether they become sharply unstable. In that setting, the firm prefers large-cap companies with stronger earnings quality and stable dividend payments, while staying more cautious on small caps that are more sensitive to financing costs.
The stock-bond diversification effect has weakened
BlackRock also said the relationship between stocks and bonds has changed. The traditional 60/40 portfolio became popular in part because equities and bonds often offset each other. When growth weakened, stocks tended to fall, while Fed rate cuts could lift bond prices and cushion part of the equity loss.
That pattern has become less reliable in recent years. Citing data from BlackRock and Morningstar, the report said the correlation between stocks and bonds was about -0.22 in 2010–2019, but rose to 0.51 from 2020 onward. In other words, stocks and bonds have been moving up or down together more often.
BlackRock said the shift reflects a change in the market’s dominant risk. When recession is the main concern, bonds can still benefit as stocks fall. But when inflation is the central worry, the picture changes. Higher inflation can push rates up, hurt bond prices, and compress equity valuations at the same time.
For that reason, BlackRock said a traditional stock-plus-bond mix may no longer provide the same stability it once did, and investors may need other assets or strategies with different return drivers to improve diversification.
What to watch next
BlackRock’s base case is that the Fed may deliver one more rate hike in 2026, but the firm does not currently expect a highly aggressive tightening cycle to develop.
For markets, the next phase is not only about whether there will be one more hike or two. BlackRock highlighted three variables that matter more.
- First, whether inflation keeps rising. If energy prices ease and inflation cools again, pressure on the Fed to keep hiking would fall. If inflation broadens further, markets may need to raise their rate expectations again.
- Second, whether the economy and corporate earnings can withstand higher rates. Historically, stocks have tended to rise after rate hikes when growth remained intact. If employment, consumption, and earnings all weaken clearly at the same time, that historical pattern may become less useful.
- Third, and most important in BlackRock’s report, the real risk may not be high rates by themselves but rates turning highly unstable.
If the economy remains resilient and markets can adapt to a higher but steady rate environment, BlackRock said stocks could still rise and bonds could still generate returns through higher coupon income. If inflation proves sticky and forces repeated upward revisions in rate expectations, sending long-term yields sharply higher, both asset classes could come under pressure again.
In that sense, the key issue in this rate-hike phase is not only when the Fed moves next. It is whether high rates can stay stable, and how long the U.S. economy can carry them.