The S&P 500 has historically seen returns slashed in times of Fed tightening. Here's what that means and which stock sectors investors should consider, according to Morgan Stanley.

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Morgan Stanley says that the S&P 500 has stumbled at the start of 2022, after the Federal Reserve laid the groundwork to start reducing support to the US economy, moves that could dull the benchmark's potential return and open the door to upside in defensive stocks.
After the S&P 500 finished last year up by 27%, the stock market is entering a period of tighter Fed policy as well as decelerating economic and corporate earnings growth. The investment bank said in a note published Monday that healthcare and other defensive sectors can take a leadership role.
Average returns seem less attractive as the Fed moves into a tighter policy regime. Morgan Stanley equity strategists led by Michael Wilson wrote that returns are lowest in a rising Fed Funds environment.
The S&P 500 has an average monthly return of 1.8% during periods of a declining Fed Funds Rate.
Wednesday's consumer inflation report could reinforce the Fed's recent signal that it will start raising interest rates and draw down its balance sheet faster than Wall Street had anticipated.
The market is six months past the peak in corporate earnings due to the Fed's potentially aggressive cycle of monetary policy.
Leadership skews more defensive in this environment. Morgan Stanley said that the defensive consumer, health care, and utilities groups have recorded gains of between 10.6% and 8% in the six to 18 months after a per-share earnings peak. The energy group did even better with a gain of 21.5%.
Business Insider has an original article.