The S&P 500 fell sharply the day the Federal Reserve announced its first rate increase in March 2022. CNBC called it a selloff. Bloomberg called it a rout. Portfolios across North America bled red, and every finance columnist in the country filed some version of the same piece: rate hikes are here, the bull market is over, brace for impact.

Eighteen months later, the S&P was up approximately 49% from that March low.

The story we tell ourselves about rising rates, that they strangle equity markets by making borrowing expensive and future earnings worth less today, is accurate in the sense that it describes a real mechanism. Central banks raise the overnight rate, commercial banks raise prime, corporations pay more to service debt, consumers pull back spending, discount rates climb, and stock valuations compress. That's all true. What the story misses is timing, magnitude, and the difference between what markets price in and what actually happens.

Markets move on expectations, not events

By the time the Bank of Canada or the Fed announces a hike, the market has spent weeks pricing it in. Rate futures, bond yields, and analyst forecasts telegraph the move. The actual announcement is the least surprising thing that happens that day. What moves markets is the gap between what was expected and what the central bank signals is coming next.

March 2022 is the textbook case. The Fed raised rates, exactly as predicted. Stocks fell because Chair Jerome Powell's commentary suggested a more aggressive path ahead than traders had modeled. The selloff was a re-rating of the terminal rate, with traders repositioning based on what Powell signaled would come next, not the initial increase everyone already knew was coming.

Six months later, the Fed hiked rates in a single meeting, the largest move since 1994. The S&P rose that day. Why? Because the market had already priced in an even larger increase and Powell hinted the pace might slow. Good news became the absence of worse news.

The real damage happens in the lag

Monetary policy works on an 18 to 24 month delay. The overnight rate changes immediately. Corporate borrowing costs adjust within weeks. But layoffs, earnings misses, consumer pullback, and housing corrections take quarters to materialize. By the time the economic slowdown actually arrives, the rate-hike cycle is often over, and markets are already pricing the recovery.

Canada's experience in 2022, 2023 shows this clearly. The Bank of Canada raised rates from 0.25% in March 2022 to 5% by July 2023. The TSX Composite peaked in March 2022, fell through the summer and early fall, then climbed back to new highs by early 2024, before inflation had even returned to the 2% target. The market didn't wait for the all-clear. It front-ran the pivot.

Sector rotation is not market death

Rate hikes don't kill stocks uniformly. They kill certain sectors and reward others. Technology and growth names, companies valued on distant cash flows, compress hard when discount rates rise. Utilities, financials, and energy often hold or gain. The S&P/TSX Composite, with financials and energy together representing close to half the index, behaved very differently than the Nasdaq during the 2022, 2023 cycle for exactly that reason.

The headline "stocks plunge" conflates the index with every constituent. A 2% drop in the index might mask a 6% fall in tech and a 3% gain in banks. Investors rotating out of high-duration growth and into dividend-paying value aren't fleeing equities. They're adjusting the mix. That's not a bear market. That's a functioning market.

Rate hikes compress valuations. They don't erase earnings. The companies still operate, still generate cash, still pay dividends. What changes is the multiple investors are willing to pay. And multiples mean-revert faster than fundamentals deteriorate.