It now looks like the Federal Reserve may raise interest rates around June of this year, after having spent years at their near-zero levels, ever since the collapse of the financial industry. This may seem to be primarily of interest to borrowers and lenders, and will certainly have an impact on the bond market, but it will also affect stock investors as well.
S&P Capital IQ looked at what happens to the price-to-earnings ratios of the S&P 500 around the time the Fed has hiked interest rates, dating back to 1946. They found that P/E ratios rose from an average of 17.7 six months before the rate hike to 18.5 on the date of the hike, then dropping back to 16.7 six months afterward.
So we might expect P/E ratios to drift upward through June, before drifting back down again after the rate hike takes hold. P/E ratios are already somewhat elevated, sitting at about 18 for the S&P 500 right now, up from 15 two years ago.
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