How Do Fed Rate Cuts Affect Stocks?
Rate cuts are not automatically good for stocks. What matters is why the Federal Reserve is cutting. Here is what happened after past first cuts, with and without a recession, and how cuts reach share prices.
Key takeaways
- It depends on the economy. Across 11 cutting cycles since 1980, the S&P 500 rose 14.1% on average in the year after the first cut, and 20.6% when no recession followed, positive every time (Northern Trust).
- When the Fed cut into a recession, results were weak: in the 2007 cycle the market was down 24% a year after the first cut (Principal).
- Cuts lower borrowing costs and the yield on cash, which supports valuations. Falling earnings in a recession can outweigh that.
- The Fed began its latest cutting cycle in September 2024 and raised its target range to 3.75–4% on Sep 16, 2026.
Are Fed rate cuts good for stocks?
Usually, unless the cuts are a response to a recession. A “good” cut lowers rates while the economy keeps growing. A “bad” cut is the Fed reacting to an economy that is already weakening fast. Markets care more about the reason than the cut itself.
The Federal Open Market Committee (FOMC) sets a target range for the federal funds rate, the rate banks charge each other overnight. That rate feeds into loan, mortgage and bond yields, and into the yield on cash.
What happened to the S&P 500 after the first rate cut?
On average stocks rose, but the spread between outcomes was wide. Northern Trust studied 11 cutting cycles from 1980 to July 2024:
| Cutting cycles since 1980 | S&P 500, 12 months after the first cut |
|---|---|
| All 11 cycles | +14.1% on average |
| No recession followed | +20.6% on average, positive in every case |
| Recession followed | Lackluster; positive in 3 of 6 cases |
Principal Asset Management (September 2024) gives individual examples:
| Cycle | Economy afterwards | S&P 500, 12 months after first cut |
|---|---|---|
| 1985 | Expansion continued | +32% |
| 1995 | Soft landing | +14% |
| 2007 | Global financial crisis | −24% |
Why does a recession change the outcome?
Because earnings fall faster than lower rates can help. Share prices are roughly earnings times a valuation multiple. Cuts tend to lift the multiple. A recession cuts the earnings. Principal notes that in the 2007 cycle, S&P 500 earnings per share were down 15% a year after the first cut, and the index was down 24%.
In a soft landing, the multiple rises and earnings keep growing, so both work in the same direction. That is the 1995 pattern. See how stocks perform in a recession.
Which cutting cycles came with a recession?
| First cut | Recession soon after? (NBER) | Note |
|---|---|---|
| 1990 | Yes, from the July 1990 peak | Cuts began near the peak |
| 1995 | No | Classic soft landing |
| 1998 | No | Cuts after the Russia default and LTCM crisis |
| 2001 | Yes, from the March 2001 peak | Dot-com bust |
| 2007 | Yes, from the December 2007 peak | Financial crisis |
| 2019 | Pandemic recession from the February 2020 peak | Classified differently by different studies |
| 2024 | No NBER recession declared to date | Cuts began Sep 18, 2024 |
Recession dates from the National Bureau of Economic Research. The hard part is that nobody knows at the time of the first cut which column a cycle will end up in. The NBER dates recessions months after they start. See recession indicators.
How do lower rates reach stock prices?
- Valuation: future profits are discounted at a lower rate, so they are worth more today. Long-duration growth stocks feel this most.
- Borrowing costs: cheaper loans help companies with floating-rate debt, small caps and housing.
- Cash yields: lower yields on money market funds make stocks and bonds relatively more attractive.
- The dollar: lower US rates can weaken the dollar, which helps US companies with large foreign sales.
- Signal: a cut can also tell markets the Fed sees weakness ahead, which can offset all of the above.
Which stocks and sectors react most to rate cuts?
Rate‑sensitive areas tend to react most: small caps, real estate, utilities, homebuilders and long‑duration growth stocks. In a soft landing, cyclical sectors often do well too. In a recession, defensive sectors such as consumer staples and health care have historically held up better, whatever the Fed does.
Bonds react directly. Long‑term Treasury prices rise when yields fall, which is why funds like TLT are so sensitive to the rate path. The sector detail is in which sectors do well when rates fall, and your own portfolio’s sensitivity in how rate‑sensitive is my portfolio?
Where is the Fed now?
The latest cutting cycle began on Sep 18, 2024, with a half‑point cut to 4.75–5%. After further cuts, the FOMC raised the range by a quarter point to 3.75–4% on Sep 16, 2026, by a 12–0 vote.
So the question in late 2026 is as much about hikes as cuts. The same logic applies in reverse: markets judge whether a move responds to a strong economy or to stubborn inflation.
How to follow the Fed with Exent
- Market Intelligence has an events calendar and daily market context with cited sources.
- Cross‑asset signals show how stocks, bonds, the dollar and commodities reacted.
- Macro Impact, now rolling out, shows how sensitive your holdings are to rates, oil, the dollar and the economy.
Frequently asked questions
On average, yes: the S&P 500 rose 14.1% in the year after the first cut across 11 cycles since 1980, per Northern Trust. But when a recession followed, results were weak, and in the 2007 cycle the market was down 24% a year later.
Because the cut can signal that the economy is weakening. If earnings fall in a recession, that outweighs the boost from lower rates.
Markets usually price expected cuts in advance, so much of the reaction happens before the decision. The longer-term outcome depends on whether the economy avoids a recession over the following year.
Rate-sensitive areas such as small caps, real estate, utilities, homebuilders and long-duration growth stocks tend to react most. In a recession, defensive sectors have historically held up better.
Not at its September 2026 meeting. On Sep 16, 2026 the FOMC raised the federal funds target range by a quarter point to 3.75–4%.
Know when to hold the index, and when to step aside.
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Educational content, not investment advice. Examples are illustrative; past performance does not guarantee future results.