(Bloomberg) — The thought of central bank policy makers easing off their campaign to liquefy bond markets has hung like a sword over equity investors for years. At least at the earnings level, there may be less reason for anguish than is usually recognized.

Research from UBS Group AG says that should the Federal Reserve turn off the spigot on its annual $1.4 trillion in quantitative-easing spending, the hit to the S&P 500 Index would be a 3% decline in prices. That’s a relatively paltry headwind for companies whose combined earnings growth analysts put at roughly 10% in each of the next two years.

While the precision of such forecasts is famously squishy, they could be framed as justifying some of the resolve retail investors have evinced over a period of steadily rising Fed hawkishness. Stock bulls just pumped $28 billion into equity exchange-traded funds in the past week, about three times the 2021 average, data compiled by Bloomberg show.

The inflows reflect confidence that the Fed’s policy shift is driven by a strengthening economy, something that also bodes well for a sustained recovery in corporate earnings, according to Malcolm Polley, president and chief investment officer at Stewart Capital Advisors LLC.

“It’s a sign from the Fed that things are improving enough that they don’t need to have these emergency measures in place, and in many ways, it should be looked at as a good thing,” Polley said by phone. “People are looking at expected rates of returns and saying, ‘I’m going to get zero in cash. I’m going to get zero to moderately negative from bonds. Let’s put the money where we think we can at least get some decent returns.’”

Stocks held steady over the past week, with the S&P 500 hovering within 2% of an all-time high, as Fed policy makers pulled forward their expectations for interest-rate increases– two before the end of 2023 — and Chair Jerome Powell disclosed that a taper debate was getting underway.

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Tracking a range of measures on financial liquidity, UBS strategist Keith Parker found that the Fed’s net asset purchases best predict equity returns. His model suggests that every $650 billion change in annualized net Fed purchases is worth a roughly 1% move for the S&P 500, all else equal. As the Fed pulls back from buying while continuing to issue Treasuries to fund government spending, the shift in liquidity would become an impediment for the market.

But with earnings upgrades poised to accelerate, blows like this could be easily absorbed, according to Parker, who expects analysts’ forecast income for the next 12 months to jump 17% between now and the end of this year.

“So earnings offset the headwinds,” Parker said in an interview. “Big beats and roll forward in time mean forward earnings expectations rise a lot more than valuations headwinds we factor in.”

Equity bulls have history on their side when it comes to tapering. In 2013, when the Fed’s announcement on a reduction in stimulus sparked a taper tantrum that sent 10-year Treasury yields skyward, the S&P 500 pulled back almost 6% from its May peak that year. But stocks staged a full recovery within weeks and went on with a rally that eventually lifted the index 30% for the whole year.

For anyone who watched the Fed come to the market’s rescue during the global financial crisis and again with the 2020 pandemic, the specter of a rate hike is wrecking nerves. Indeed, the 2016-2018 tightening cycle preceded a scare for the last bull market as the S&P 500 tumbled almost 20%. Not to mention the bursting of the internet bubble that was exacerbated by a 50-basis-point increase in May 2000.

But there are instances where stocks held up well against a hawkish Fed, as happened during the 1994-1995 tightening cycle. While the market made little headway, the S&P 500’s drawdown was subdued as well — less than 10%. The 2004-2006 episode of rate hikes was accompanied by a 13% advance in the equity benchmark.

“A slow and steady drip of rate increases is not necessarily bad for stocks,” said Nicholas Colas, co-founder of DataTrek Research. “Earnings growth should buffer stock prices against that issue; we still believe the Street’s estimates are too low.”

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