The 2015–2018 cycle shows that earnings can overcome higher rates—until tightening, valuations and slower growth collide.
MARKET INSIDER — A Federal Reserve rate increase would not automatically end the AI-led equity bull market. History shows that stocks can continue rising during a gradual tightening cycle when economic growth remains resilient and corporate earnings increase faster than valuation multiples contract.
Between the Fed’s first increase in December 2015 and mid-2018, the S&P 500 generated a total return of about 40%, while technology stocks performed considerably better. The warning came later: after nine rate increases, balance-sheet reduction and weakening global growth converged, the index fell almost 20%. For today’s investors, the decisive variable is not the first hike—it is whether AI-related profits can keep justifying elevated valuations as financial conditions tighten.
Key Highlights
- The Fed raised rates nine times between December 2015 and December 2018, yet stocks advanced through most of the cycle.
- Technology outperformed because earnings growth from cloud computing, semiconductors and digital platforms offset valuation pressure.
- The late-2018 selloff shows that cumulative tightening becomes dangerous when growth and earnings expectations begin to weaken.
The 2015–2018 cycle began with economic strength
The Federal Reserve began raising rates in December 2015 after holding its target range near zero for seven years following the global financial crisis.
Employment had recovered, economic activity was expanding and policymakers believed the economy no longer required emergency-level monetary support. The first increase lifted the federal-funds target range to 0.25%–0.5%.
This distinction matters. There is a meaningful difference between gradual normalization during a healthy expansion and aggressive tightening intended to suppress inflation by weakening demand.
When growth and employment are resilient, modest rate increases can coexist with rising revenue and profits. When inflation is sufficiently severe that the Fed must deliberately slow the economy, the risk to corporate earnings becomes substantially greater.
The full cycle included nine quarter-point increases: One in December 2015; One in December 2016; Three during 2017; Four during 2018
By December 2018, the target range had reached 2.25%–2.5%. (federalreserve.gov, forbes.com)
Stocks continued rising after the first increase
The first rate increase did not immediately end the bull market.
Equities experienced significant volatility in early 2016, but interest rates were only one factor. Investors were also confronting collapsing oil prices, concerns about China and fears of a global industrial slowdown.
As those risks eased, the S&P 500 recovered and reached new highs even as the Fed continued raising rates.
The case-study calculations show an S&P 500 cumulative total return of approximately 40.3% between December 16, 2015 and July 6, 2018. That figure includes dividends.
The dates are important. The return ends in July 2018, before the final two rate increases and the severe fourth-quarter correction. It must not be presented as the performance of the entire nine-hike cycle.
The correct conclusion is that a first hike is not necessarily a standalone sell signal. It is not that interest rates cease to matter.
Investors instead need to determine why the Fed is tightening, how quickly it intends to proceed and whether earnings can continue growing after borrowing costs increase.
Earnings absorbed lower valuations
Corporate profits were the principal support for the market.
The research underlying this case study records S&P 500 quarterly earnings per share rising from approximately $24.82 in the first quarter of 2016 to $35.45 in the first quarter of 2018—an increase of about 42.8%.
That growth illustrates how share prices can rise even when higher interest rates reduce the valuation investors are willing to pay.
Consider a company earning $5 per share and trading at 25 times earnings. Its implied share price is $125.
If its valuation subsequently falls to 22 times earnings but profits rise to $7 per share, the stock would be worth $154.
The price-to-earnings multiple contracted by 12%, yet the share price increased by more than 23% because earnings grew faster than the valuation declined.
This is the central mechanism through which bull markets survive rate increases. Stronger profits can absorb a higher discount rate—but only up to a point.
Technology led the market despite higher rates
Technology was the strongest major sector during much of the 2015–2018 tightening cycle.
The case-study data show an information-technology total return of approximately 75.6% from December 16, 2015 through July 6, 2018, compared with 40.3% for the S&P 500.
Cloud computing, mobile devices, digital advertising, e-commerce, enterprise software and semiconductor demand created a powerful earnings cycle. Investors continued paying premium valuations because the underlying businesses were expanding rapidly.
The comparison with today’s AI boom is useful.
AI investment now extends across processors, memory, networking equipment, optical components, servers, cloud platforms, electricity generation, cooling systems and data-center construction. This breadth gives the cycle multiple potential sources of revenue and earnings.
But the comparison is not exact.
Many technology companies entered the 2015–2018 period with lower valuations and less concentrated expectations. Today, a substantial share of index performance depends on a relatively small number of companies, while extraordinary amounts of capital are being committed before the ultimate return on many AI projects is known.
The existence of a transformative technology does not guarantee that every supplier will earn attractive returns—or that any valuation is justified.
Late 2018 provides the essential warning
The strongest challenge to the bullish interpretation comes from the end of the same historical cycle.
By late 2018, the Fed had raised rates repeatedly and was reducing its securities holdings. The central bank’s domestic portfolio declined by approximately $380 billion during 2018 as maturing assets were allowed to run off.
At the same time, U.S.–China trade tensions intensified, global growth weakened and investors became concerned that monetary policy had turned too restrictive.
The S&P 500 finished the Christmas Eve session 19.8% below its September 20 closing high—just short of the conventional definition of a bear market.
That decline demonstrates why selectively ending the historical comparison in July can be misleading. Stocks performed strongly after the first several increases, but cumulative tightening eventually mattered when the earnings outlook became less secure.
The first hike did not “cut the deepest.” The greatest damage occurred later, when higher rates, quantitative tightening and deteriorating growth expectations arrived together.
Applying the lesson to AI stocks
For AI stocks, the key question is whether earnings can grow rapidly enough to offset two forms of pressure.
The first is multiple compression. Higher Treasury yields increase the return available from safer assets and reduce the present value of profits expected many years into the future.
The second is potential earnings disappointment. If cloud companies reduce capital expenditure, data-center construction slows or customers struggle to monetize AI services, suppliers may not achieve the profits embedded in their valuations.
The most resilient companies should be those already converting AI demand into revenue, free cash flow and durable margins. Businesses relying primarily on narratives, distant forecasts or continuous access to inexpensive capital are more vulnerable.
Investors should therefore examine: AI-related revenue rather than general references to “AI demand”; Operating margins and free cash flow after capital expenditure; Customer concentration and order cancellations; Data-center utilization and returns on invested capital; Balance-sheet strength and refinancing requirements, and Valuation relative to realistic earnings growth
A gradual Fed cycle could produce a rotation within the AI theme rather than end it. Profitable platform companies and essential infrastructure providers may remain resilient, while speculative or heavily leveraged names underperform.
Today’s setup is less comfortable than 2015
Markets currently assign close to a 90% probability to a Fed increase at its September meeting, as persistent inflation and Brent crude above $108 reinforce expectations of renewed tightening.
This is not a straightforward replay of December 2015.
The current Fed is considering raising rates because inflation remains above target and another energy shock threatens to keep it elevated. Long-term Treasury yields are already near multi-year highs, leaving less room for valuations to expand.
At the same time, AI investment and corporate earnings remain substantial sources of economic growth. JPMorgan argues that equities can absorb measured increases if earnings remain robust and inflation expectations do not become unanchored.
That conditional language is crucial. Stocks may survive higher rates, but only if the earnings side of the equation continues to deliver.
What investors should watch next
The Fed’s pace matters more than the first decision. One or two measured increases would be easier for markets to absorb than a rapid sequence accompanied by continued balance-sheet contraction.
Treasury yields provide the clearest real-time measure of financial pressure. A sustained rise in the 10-year yield above 5% would increase valuation risk for long-duration technology stocks.
AI capital-expenditure guidance is equally important. As long as hyperscalers maintain spending and suppliers convert orders into cash flow, the earnings engine may continue offsetting tighter financial conditions.
Finally, investors should monitor earnings revisions. Falling forecasts combined with rising yields would recreate the most dangerous feature of late 2018: a simultaneous deterioration in both profits and valuation support.
The 2015–2018 cycle does not prove that AI stocks will survive renewed Fed tightening. It demonstrates that rate increases alone rarely determine the end of a bull market. The greater threat emerges when the cost of money keeps rising after the earnings engine has started to slow.
