Investors are fixated on whether the Fed raises rates this week. The more important question is what happens after that.

History suggests the bull market in stocks will continue if the Fed raises interest rates this week, but there are things investors can do to take some precaution if hikes continues.

Investors are treating this week's Federal Reserve meeting like a potential breaking point for the bull market.

I think that gives one 25-basis-point (0.25 percentage point) rate hike far too much credit.

A rate hike would give new Fed Chairman Kevin Warsh some much-needed credibility. It would also spark some near-term volatility, with small-capitalization stocks, speculative technology stocks and unprofitable companies feeling it first.

But one rate hike has rarely been enough to derail a bull market. That doesn't mean I'm just standing pat.

One token hike isn't the problem

In March 1997, Alan Greenspan's Federal Reserve raised rates by 25 basis points.

And then they stopped. Stocks initially stumbled. The S&P 500 index SPX fell roughly 3% over the following few weeks as investors adjusted to tighter monetary policy. By the end of the year, the index had gained more than 30%.

The broader historical record tells a similar story.

Across 21 previous Fed tightening cycles, the S&P 500 has been higher 12 months after the first hike 81% of the time, with an average gain of 6.7%.

That may sound bizarre if your most recent memory of rising rates is 2022. But size and speed matter in monetary policy.

The Fed didn't wreck stocks in 2022 by hiking once. It delivered the equivalent of 21 quarter-point hikes in roughly 18 months, starting from near 0%. Bond yields surged, valuations compressed and long-duration growth stocks that typified pandemic-era markets, such as Teladoc Health (TDOC) and Peloton Interactive (PTON), were demolished.

Today, the federal-funds rate is already 3.5%-3.75%, and markets have had plenty of time to adjust to expensive money. Another quarter-point hike would hardly recreate 2022.

What would actually change my mind

I've been consistently bullish on stocks since early 2023. That's been the right call as the S&P 500 has nearly doubled over that period.

It would take something much uglier than one hike to change my outlook: evidence that the Fed is beginning another sustained tightening cycle.

A 1997-style one-off hike is manageable, but a string of additional hikes changes the economic math. A few indicators can help forecast which environment we're headed into.

The first is the 2-year Treasury yield BX:TMUBMUSD02Y, arguably the best market gauge of future Fed policy. Right now, it's pricing in another two to three hikes over the next year. It's worth watching, but nowhere near the monetary shock of 2022.

Then there's inflation. One hot consumer-price-index report can create volatility. Several consecutive months of accelerating inflation would be much more concerning. And with Friday's CPI print showing the lowest core CPI since March 2021 and five-year inflation expectations anchored, I continue to view the inflation story as overblown.

I'm also watching credit spreads. Treasury yields tell you the price of money, while credit spreads - the spread between yields on corporate debt and Treasurys with the same duration - tell you whether something is breaking. And with high-yield spreads near five-year lows, there is little stress in the financial system despite multidecade-high bond yields.

As long as spreads remain relatively contained, the credit market is telling us companies can still access capital without investors demanding crisis-level compensation.

I'm also watching corporate earnings. They won't tell us whether the Fed is about to tighten further, but they will tell us how much tightening the bull market can absorb.

The latest quarter produced more than 50% growth in aggregate S&P 500 earnings-per-share, according to FactSet data, with strength extending well beyond the handful of megacap AI names as 10 of 11 sectors saw profits increase.

That gives the market a much bigger cushion against higher rates. If earnings remain strong, stocks can withstand a surprisingly restrictive Fed. But if earnings start deteriorating while rates rise and oil is over $100, the bull-market setup becomes much more fragile and I'll pull out the defensive playbook.

The market cares about the path

That's why I think investors may be asking the wrong question this week.

"Will the Fed hike?" matters. And the market is pricing about an 88% chance they will on Wednesday.

But the better question is: If it hikes, is this one adjustment or the beginning of another tightening cycle?

Those are very different investing environments. If the Fed raises rates once and then pauses, history suggests the bull market can handle it. But if persistent inflation forces policymakers into three, four, or five additional hikes, my outlook changes substantially.

For now, I'm not making major portfolio changes based on the possibility of one hike. My main adjustment has been taking profits on richly valued, unprofitable small-cap growth stocks. Those companies are particularly vulnerable when financing costs rise because many depend on debt and equity markets to fund growth.

But I'm also not sitting on my hands. Recently, I've been buying energy and healthcare companies that are well positioned for a "higher for longer" environment. Investors can play those themes broadly through ETFs such as the Alerian MLP ETF AMLP and Vanguard Health Care ETF VHT.

Personally, I prefer individual stocks. I'll break down one of my favorite "higher for longer" investments in my next free Let's Analyze newsletter, including why I'm buying it and the setup I'm watching. You can subscribe here to get the research when it goes live.

Just remember that one hike this week could absolutely create volatility.

But the real danger begins if the Fed keeps coming back for more.

Robert Ross is the founder of TikStocks and author of "A Beginner's Guide to High-Risk, High-Reward Investing." A former chief equity analyst at Mauldin Economics, Ross writes the investment newsletter Let's Analyze on Substack and hosts the weekly Room to Run podcast.

-Robert Ross