How Interest Rate Cuts Won't Fuel the Stock Market's Rise

Investors in U.S. stock markets may need to rethink their intense focus on the Federal Reserve’s interest rate policy. While speculation continues to swirl over when the Fed will next cut rates and by how much, historical data suggests that the stock market’s performance following rate cuts doesn’t follow a consistent or predictable pattern.

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Despite the widespread belief that rate cuts are inherently bullish for equities, the truth is more nuanced. Sometimes the market rallies after a rate cut, and sometimes it doesn’t. Overall, market returns following rate reductions aren’t meaningfully different from the long-term average performance of stocks.

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Nevertheless, Wall Street remains fixated on the Fed’s next move. Questions abound: How many times will the Fed lower rates in 2025? Can Fed Chair Jerome Powell resist growing political pressure from the White House to act more aggressively? While these are legitimate concerns, they may be distracting investors from more meaningful drivers of stock performance.

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A historical analysis going back to 1980—when the Fed began publicly announcing its target interest rate following each policy meeting—shows why this obsession might be misplaced. A chart comparing stock returns after various types of rate cuts with overall market performance illustrates the point.

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The chart looks at three scenarios: (a) the market’s return after the first cut in a new easing cycle; (b) after the fourth cut in a cycle, relevant today since the next move would be the fourth cut in the current cycle; and (c) after any rate cut in general. For each scenario, returns were measured over one, three, six, and twelve-month periods.

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While returns were slightly higher in some cases and lower in others, none of the differences reached statistical significance at the 95% confidence level—a common benchmark used to determine whether results are likely to be meaningful rather than due to chance. In other words, no clear or consistent pattern emerged that would support the idea that Fed rate cuts reliably influence market performance in the short to medium term.

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This lack of correlation may be due in part to the small sample size within each category of rate cuts. To gain a broader perspective, a more data-rich approach was taken using the CME Group’s FedWatch tool. This tool tracks investor expectations for future Fed rate decisions based on fed funds futures prices.

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Focusing specifically on market expectations for the December 2025 Fed meeting, the analysis measured the relationship between daily changes in these interest-rate expectations and movements in the S&P 500. Interestingly, the findings revealed a statistically significant—but counterintuitive—relationship: the stock market tended to perform better on days when expectations for December interest rates were higher.

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At first glance, this may seem surprising. Conventional wisdom suggests that higher interest rates dampen economic growth and reduce the appeal of risk assets like equities. However, rising rate expectations often coincide with optimism about the U.S. economy’s underlying strength. When investors believe the Fed can afford to keep rates higher, it’s often because they expect the economy to continue expanding at a healthy pace.

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This phenomenon reflects a broader truth about financial markets: context matters. Higher interest rates are not always a negative for stocks. In an environment where corporate earnings are strong, unemployment is low, and consumer spending is solid, higher rates can simply represent a healthy economy. In such cases, equities can still climb even as borrowing costs rise.

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This backdrop helps explain why the S&P 500 has sometimes moved higher on days when FedWatch forecasts indicated rising rate expectations. It’s not that markets love tighter monetary policy—it’s that they’re responding to signs of economic resilience that make higher rates tolerable.

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So, what does all this mean for investors? The takeaway is clear: don’t overreact to Fed rate cut predictions. While monetary policy certainly influences financial markets, it is far from the only factor. Corporate earnings, geopolitical developments, consumer behavior, and broader macroeconomic trends often have just as much—if not more—impact.

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Rather than trying to predict the precise timing or number of rate cuts, investors may be better served by focusing on fundamentals. A strong economy, stable inflation, and healthy business growth are all more reliable indicators of long-term market direction than the Fed’s next move alone.

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In sum, while the Federal Reserve’s policies remain important, historical evidence shows that markets don’t always behave predictably around rate decisions. Obsessing over them may cause investors to miss the bigger picture. Understanding how interest rate expectations fit into the broader economic narrative is ultimately more useful than trying to time the market based on Fed speculation.

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