The S&P 500 is facing fresh pressure from rising interest rates, after the Federal Reserve unexpectedly moved toward higher rates instead of cutting them. The shift has raised concerns that borrowing costs could stay high and put pressure on stocks.
September is already a weak month for the S&P 500 historically. Since 1928, the index has fallen in September 55% of the time and has lost an average of 1.1% during the month, according to Yardeni Research.
Why September is weak for stocks
Experts disagree on why September is often weak for stocks. Some believe investors expect September to be bad, creating a self-fulfilling pattern. Others point to seasonal factors such as portfolio rebalancing and investors returning from summer vacations.
This September, the S&P 500 traded mostly sideways during the first three weeks. But concerns about the US economy have recently increased, raising the possibility of a stock market correction.
Fed raises interest rates
The biggest new threat is the Federal Reserve’s decision to raise interest rates. President Donald Trump had publicly pushed the Fed to lower rates before its latest meeting. Trump had even called for lower rates on social media before the Fed meeting. He said the US should have “the lowest interest rate in the world” and threatened to stop trading with countries where the US has a trade deficit.
The Fed went in the opposite direction. The Federal Open Market Committee voted unanimously to raise its target range for the federal funds rate, marking the first interest-rate increase in more than three years. Most Fed officials also signaled that another quarter-point rate hike could come later in 2026. That means investors may have to prepare for borrowing costs to remain high or move even higher.
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Higher rates hurt stocks
Higher rates are a problem for stocks because they make borrowing more expensive. Companies can face higher financing costs, while consumers may cut spending because loans, credit and other borrowing become more expensive.
Inflation keeps rates high
Inflation is one of the main reasons the Fed is keeping pressure on interest rates. Some policies under Trump’s second term have added to inflationary pressure, according to The Motley Fool. Tariffs are one factor pushing prices higher. Research from the Federal Reserve Banks of St. Louis and Minneapolis found that tariffs have added about 0.4 percentage points to core inflation.
Higher oil prices are another inflation concern. Regular gasoline prices have increased 40% over the past year as the conflict in the Middle East has disrupted global oil supplies. The stock market has historically struggled when a new Fed rate-hike cycle begins. Over the past 25 years, the Fed has started three rate-hike cycles.
S&P 500 rate hike risk
After the first rate hike in each of those three cycles, the S&P 500 fell by an average of 11% at some point during the following three months. The data highlights how quickly higher rates can affect investor sentiment. The Nasdaq Composite performed even worse during those periods. It fell by an average of 17% after the first rate increase in those three historical rate-hike cycles.
Treasury yields rise
Treasury yields are adding another layer of pressure on stocks. US government bond yields have risen sharply in recent weeks as investors worry about inflation, the national debt and the possibility of more Fed rate hikes.
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Heavy corporate borrowing for artificial intelligence projects is also putting pressure on bond yields. Companies raising large amounts of money for AI projects are competing with the US government and other borrowers for investor capital. Rising Treasury yields are now seen as a major stock-market risk by fund managers. Bank of America’s latest fund-manager survey found that rising yields were viewed as the single biggest risk to the stock market.
Higher yields pressure profits
Higher borrowing costs can hurt corporate earnings. When loans become more expensive, companies and consumers generally have less money available to spend, which can slow economic activity and make it harder for businesses to grow profits.
Higher Treasury yields can also make bonds more attractive compared with stocks. Investors may question why they should take the risk of owning stocks when relatively safe US government bonds are offering higher returns.
Investors may move to bonds
That could push some investors to move money from stocks into bonds. As Treasury yields rise, the incentive to shift capital toward bonds becomes stronger. The 10-year Treasury yield recently crossed 5%. It stood at 5.01% when the market closed on September 18, the highest level since July 2007.
10-year Treasury yield hits 5%
The last time the 10-year Treasury yield reached similar levels, stocks later suffered major losses. After the 2007 period, both the S&P 500 and Nasdaq Composite entered bear markets and fell more than 20% over the following year. The current risk comes from two sides: the Fed and the bond market. The Fed has raised its benchmark interest rate, while rising Treasury yields show that investors are preparing for the possibility of even higher interest rates.
S&P 500 faces correction risk
For the S&P 500, the key concern is what higher rates could do to company profits and stock valuations. If borrowing costs stay high, businesses and consumers may spend less, while investors may become more willing to choose bonds over stocks.
That combination could create a tougher environment for US stocks. The historical pattern of market declines after Fed rate hikes, along with rising Treasury yields, suggests investors are facing a higher risk of a correction.