Interest Rates and Equity Market Performance: An Empirical Study of the U.S. Market, 2000–2025
0 viewsAbstract
This study examines the relationship between the U.S. federal funds effective rate and annual S&P 500 total returns over the 2000–2025 period. The topic is important in finance because interest rates influence the discounting of expected cash flows, financing conditions, and investors’ required returns. Previous research shows that monetary policy can affect equity prices, particularly when policy changes are unexpected, but the strength and timing of the relationship can vary depending on the measurement period and identification method. Using annual observations from the Federal Reserve Bank of St. Louis FRED database for the federal funds rate and published annual S&P 500 total returns, this study applies descriptive statistics, Pearson correlation, an ordinary least squares regression, and a one-year lagged-rate regression. The contemporaneous regression produces a negative coefficient of approximately 1.29 percentage points in annual S&P 500 total return for each one-percentage-point increase in the federal funds rate, but the coefficient is not statistically significant at conventional levels (p = .480). The correlation is also weakly negative (r = −0.145), and the model explains only about 2.1% of annual return variation. The lagged-rate specification produces a more negative coefficient (−2.75), but it also fails to reach conventional statistical significance (p = .134). These findings indicate that annual interest-rate levels alone do not adequately explain annual equity returns over this sample. The results are consistent with the broader literature emphasizing that stock-market responses depend on policy surprises, expectations, risk premiums, dividends, and other macroeconomic conditions.
Keywords
Asset Valuation, Equity Returns, Federal Funds Rate, Macroeconomics, Monetary policy, Ols Regression, S&P 500