A Fed pause in interest rate hikes may not be enough to boost the stock market the way investors are hoping

• Some investors are betting that a Fed pause in interest rate hikes will boost stock prices, but Ned Davis Research says not so fast.
• NDR found that a Fed pause in interest rate hikes has historically delivered weak 1-year forward returns.
• "A Fed shift to a slightly less hawkish stance might not be enough for growth sectors to regain sustained leadership," NDR said.

After a near 25% decline in the stock market so far this year, investors are looking for any bullish signs to hang onto as they navigate volatile markets.

An emerging bullish catalyst for stocks cited by investment strategists on Wall Street is the potential for a pause in the Federal Reserve's interest rate hikes. Fundstrat's Tom Lee argued this week that investors are not positioned for a pause, and that it would likely spark a shift in which investors would start buying stocks again.

But according to a historical analysis by Ned Davis Research, a Fed pause in rate hikes may not be enough to deliver the type of stock market returns some on Wall Street expect.

Comparing one-year forward stock market returns after various Fed policy shifts showed that a Fed pause in interest rate hikes was the weakest of the bunch, relative to the end of a tightening cycle, interest rate cuts, and the start of quantitative easing, according to NDR.

"The bottom line is that not all dovish policy shifts are created equal," NDR's Rob Anderson and Thanh Nguyen said in a Friday note. "The S&P 500 has responded best to outright dovish policy stances compared to marginally less hawkish ones."

Median returns for the S&P 500 one year after the Fed paused interest rate hikes was virtually flat at -0.3%. The best performing sectors included financials and materials, while technology stocks were the worst performers, falling more than 9%.

"Cyclical growth sectors have struggled the most post pause, with technology the worst performer over both timeframes," NDR said.

Comparatively, the S&P 500 delivered median returns of 11.8% one-year after the Fed made its final rate hike of a tightening cycle, 16.1% one-year after the Fed's first interest rate cut, and 23.7% one-year after the Fed launched quantitative easing.

That means a slightly less hawkish Fed in the form of a pause in interest rate hikes "might not be enough for growth sectors to regain sustained leadership," NDR concluded.

Instead, investors betting on more sustained advances in the stock market should hope that a Fed pause in rate hikes ultimately transforms into a complete end in the Fed's current rate hiking cycle. Otherwise, the gains may be fleeting.