Concerns over a looming Federal Reserve rate increase are growing, yet this has not pushed Wall Street strategists toward a bearish stance on US equities. Teams at Morgan Stanley, JPMorgan, and Goldman Sachs argue that markets have already priced in a policy shift, with corporate earnings and economic growth still serving as the primary pillars of support. In their view, a single rate hike is unlikely to alter the medium-term trajectory of the current rally.

Market pricing currently indicates an 87% probability that the Fed will deliver a rate hike this week, which would mark the first increase in three years. Meanwhile, the S&P 500 sits within 2% of its all-time high, and corporate profitability remains robust. Rather than focusing on the hike itself, strategists are paying closer attention to whether monetary tightening will further dampen economic activity and dent corporate earnings.

Historical precedent suggests that sustained tightening cycles, often accompanied by recessions, are far more likely to trigger bear markets than a single policy adjustment. Bloomberg analysis shows that since 1945, the S&P 500 has experienced 12 bear markets with declines exceeding 20%, plus four additional corrections ranging from 18% to 20%. Of those, six bear markets followed recessions directly caused by rate-hiking cycles, while only two were triggered by factors unrelated to either tightening or recession.

Short-term pressure currently stems from inflation and interest rates. Oil prices persistently holding above $100 per barrel and the 10-year Treasury yield approaching 5% have reignited concerns about inflationary pressure. US stocks have been volatile since hitting record highs in mid-August, with Nasdaq 100 futures dropping 1.6% on Monday.

Wall Street's Perspective: Earnings, Yields, and Oil as Key Drivers

Ben Snider, chief US equity strategist at Goldman Sachs, noted that markets have already priced in more than three rate hikes over the coming year, while corporate earnings and balance sheets remain solid. Consequently, the policy shift itself is likely to have a limited impact on equities.

Michael Wilson at Morgan Stanley is directing attention to Treasury yields. If inflation shocks significantly exceed expectations, US stocks could experience a technical correction of around 10%. This risk is amplified by oil prices reclaiming the $100 per barrel threshold and ongoing geopolitical tensions in the Middle East, which could push long-end yields higher and add pressure to richly valued equities.

However, Wilson emphasizes the importance of distinguishing why yields are rising. If the 10-year Treasury yield climbs primarily due to stronger nominal economic growth—rather than runaway inflation—stocks would still have room to absorb the move. In such a scenario, equities could continue to serve a partial inflation-hedging function.

JPMorgan's strategy team views oil as a critical near-term variable. Continued oil price gains could lift inflation expectations and further compress equity valuations; conversely, if oil pressure eases, markets would find it easier to digest the impact of rate hikes.

Mislav Matejka, head of equity strategy at JPMorgan, also cautioned that September has historically been a weak month for US stocks, and seasonal factors could amplify recent volatility. Looking at the longer cycle, however, the market's ability to sustain its strength will depend on economic and earnings performance rather than a single policy event.