US stock market reaction to Fed rate cuts: After months of weak job growth, investors are looking to the Federal Reserve with growing anticipation, as many are expecting the central bank to cut interest rates at its September meeting, and if history repeats itself, that could be a big win for the stock market, as per a report.
Jeff Buchbinder, LPL's chief equity strategist, said that, "Using history and prior Fed cutting cycles as a guide, some upside potential may remain for the second half of 2025," adding, "But of course, past performance does not guarantee future results, and a new tariff regime not seen since the 1930s could slow earnings growth and fuel volatility," as quoted in the report.
ALSO READ: The hidden recession: Job cuts, housing freeze, and fear grip US economy behind the AI boom and surging Wall Street
Some of the most significant gains in stock market history followed periods of falling interest rates. The S&P 500 surged 161% from 1995 to 1999 in the lead-up to the dot-com bubble, reported Business Insider. Other notable rallies include a 62.8% gain from 1984 to 1993 and a 38.2% rise from 2019 to 2021, according to the report.
Still, not all rate-cutting cycles have gone smoothly. During the 2007 to 2009 financial crisis, the market dropped 23.5% despite rate reductions. Similarly, between 2001 and 2004, the S&P 500 fell 9.6%, proving that timing and context matter, as per Business Insider.
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Buchbinder pointed out that "The delayed effects of trade policy are likely to weigh on the economy in the second half, leading to weaker labor market demand," adding, "Recent market complacency toward trade policy and an economic narrative dependent upon strong economic data has caught our attention in recent weeks as a potential point of weakness," as quoted by Business Insider.
He said, "Bottom line, investors may be well served by bracing for occasional bouts of volatility given how much optimism is currently reflected in equity prices," as quoted in the report.
LPL’s short-term strategy team is also closely monitoring tariff negotiations, inflation data, bond yields, and earnings results for signs of a better entry point to add exposure to equities, according to Business Insider.
Historically, rate cuts have led to big gains in the stock market, especially in the months following the first cut, as per the Business Insider report.
Are all investors expecting a rate cut?
Most are as CME data shows a 93% chance. But big banks like Morgan Stanley think the Fed may wait.
S&P 500 Has Historically Surged After Fed's Interest Rate Cuts
According to a new analysis from LPL Financial, the S&P 500 has historically performed well during rate-cutting cycles, as reported by Business Insider. Since 1974, the index has gained an average of 30.3% from the first rate cut until the beginning of the next rate-hiking cycle, according to the report. The median return in those periods was 13.3%, with stocks finishing higher in six out of nine cases, as per Business Insider.Jeff Buchbinder, LPL's chief equity strategist, said that, "Using history and prior Fed cutting cycles as a guide, some upside potential may remain for the second half of 2025," adding, "But of course, past performance does not guarantee future results, and a new tariff regime not seen since the 1930s could slow earnings growth and fuel volatility," as quoted in the report.
ALSO READ: The hidden recession: Job cuts, housing freeze, and fear grip US economy behind the AI boom and surging Wall Street
Biggest Bull Markets Often Follow Fed Easing Cycles
Some of the most significant gains in stock market history followed periods of falling interest rates. The S&P 500 surged 161% from 1995 to 1999 in the lead-up to the dot-com bubble, reported Business Insider. Other notable rallies include a 62.8% gain from 1984 to 1993 and a 38.2% rise from 2019 to 2021, according to the report.
Fed Rate Cuts Don’t Always Guarantee Stock Gains
Still, not all rate-cutting cycles have gone smoothly. During the 2007 to 2009 financial crisis, the market dropped 23.5% despite rate reductions. Similarly, between 2001 and 2004, the S&P 500 fell 9.6%, proving that timing and context matter, as per Business Insider.ALSO READ: Japan’s population plunges by 900,000 in just 1 year — worst drop in modern history as birth rates hit crisis point
Trade War and Tariffs Could Undermine Fed’s Impact
This time around, there are new challenges. The stock market has already climbed more than 12% since the Fed's first cut last September, fueled largely by excitement around artificial intelligence and strong tech earnings, according to the report.Buchbinder pointed out that "The delayed effects of trade policy are likely to weigh on the economy in the second half, leading to weaker labor market demand," adding, "Recent market complacency toward trade policy and an economic narrative dependent upon strong economic data has caught our attention in recent weeks as a potential point of weakness," as quoted by Business Insider.
Wall Street Divided on Whether Fed Will Cut Rates in 2025
While investors are betting heavily on a September rate cut, with CME FedWatch showing over 93% odds, major institutions like Morgan Stanley and Bank of America believe the Fed may hold rates steady for the rest of 2025, according to the report.Best Stock Sectors to Watch During Rate-Cut Cycles
Given these mixed signals, Buchbinder recommends a cautious approach. He believes it's too early to increase portfolio risk beyond benchmark levels and suggests focusing on large-cap growth stocks, along with financials and communication services, as reported by Business Insider.He said, "Bottom line, investors may be well served by bracing for occasional bouts of volatility given how much optimism is currently reflected in equity prices," as quoted in the report.
LPL’s short-term strategy team is also closely monitoring tariff negotiations, inflation data, bond yields, and earnings results for signs of a better entry point to add exposure to equities, according to Business Insider.
FAQs
How do rate cuts usually affect the stock market?Historically, rate cuts have led to big gains in the stock market, especially in the months following the first cut, as per the Business Insider report.
Are all investors expecting a rate cut?
Most are as CME data shows a 93% chance. But big banks like Morgan Stanley think the Fed may wait.
