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Visualized: How Do Interest Rate Cuts Impact the Stock Market?
September 20, 2024
The Federal Reserve cut interest rates this week for the first time since 2020.
Historically, the S&P 500 returns 4.9% on average one year after the first interest rate cut, and returns have been positive nearly 70% of the time. In the first three months following an initial cut, the markets tend to dip, but usually rebound by the six-month mark.
However, stock market performance following the initiation of a rate-cut cycle can vary widely. For example, U.S. equities saw double-digit declines after the first rate cuts in 1973, 1981, 2001, and 2007. In some sense, this has to do with why the Fed is rating cuts, as in the case of 1981 and 2007, they were reacting to a broader economic crisis.
Ultimately, earnings growth may be the determining factor of where the markets go. When interest rate cuts begin when earnings growth is positive, as it is now, the S&P 500 averages a return of 14% one year later. When the rate cut comes amid declining earnings, the S&P 500 increased by 7% on average.
For a full breakdown of how the markets have reacted to interest rate cuts over the past 40 years, our friends at Visual Capitalist have compiled the following infographic, based on data from PinPoint Macro Analysis.
