U.S. stocks usually stumble after Fed hikes, but these markets tend to climb, says Citi

Following the Federal Reserve’s first interest-rate hike in a new tightening cycle, U.S. equities often face headwinds as investors adjust to stricter financial conditions. However, historical data from Citi suggests that international markets, specifically Japanese and U.K. equities, tend to move in the opposite direction. According to the analysis, these markets see average relative returns of between 2% and 3% following the initial rate increase.

This divergence is largely attributed to currency dynamics and domestic monetary policy. A U.S. rate hike typically strengthens the dollar, which can pressure U.S. multinational earnings but may benefit exporters in other regions differently. Furthermore, if the Bank of Japan or the Bank of England are not hiking in tandem, their local liquidity conditions remain more accommodative, offering a supportive backdrop for their respective equity indices.

For investors, the key takeaway is that a Fed tightening cycle does not uniformly suppress global risk assets. The market relevance lies in regional differentiation rather than a blanket sell-off. Looking ahead, the critical variable to watch is the pace of subsequent Fed moves and whether foreign central banks begin to mirror the Fed’s hawkish stance, which would likely erode this historical performance edge.