The U.S. interest rate cut cycle is coming: Will the stock market go up or down? An article explaining opportunities across various industries

September 18, the U.S. Federal Reserve announced its first 50 bps rate cut, bringing the federal funds rate to 4.75%-5.00%. This is the first policy rate reduction since the COVID-19 pandemic in 2020. This decision marks a shift in U.S. monetary policy from tightening to easing, with profound implications for global asset allocation.

But is a rate cut good news for the stock market or a risk signal? History shows that the answer is not simply “yes” or “no,” but depends on the economic cycle, market expectations, and policy implementation effectiveness.

Economic Signals Behind the Rate Cut

The Fed’s decision to cut rates reflects changes in economic growth momentum. The unemployment rate has risen from 3.80% in March 2024 to 4.30% in July, triggering recession warning signals. Meanwhile, the ISM Manufacturing PMI has been in contraction for five consecutive months. As a result, the Fed lowered its GDP growth forecast for this year from 2.1% to 2.0%.

In this context, central banks tend to cut rates under the following conditions:

When economic growth is weak, rate cuts can reduce corporate financing costs and promote consumption and investment. Lower borrowing costs encourage consumers to take out large loans for homes and cars, boosting economic growth.

When facing deflation risks, lowering interest rates can increase the money supply, accelerate circulation, and stabilize prices.

When the financial system faces liquidity crises, the central bank may cut rates to provide ample liquidity and prevent credit crunches.

When external economic shocks occur, such as a global slowdown or intensified trade tensions, rate cuts serve as tools to enhance economic resilience.

How Do Stock Markets Perform Under U.S. Rate Cuts?

Historical data is the best reference. Goldman Sachs macro strategist Vickie Chang pointed out that since the mid-1980s, the Fed has implemented 10 rate-cutting cycles. Four of these were associated with recessions, while six were not. The key difference is: when the Fed successfully prevents a recession, stocks tend to rise; when it fails, stocks tend to fall.

Let’s review the four rate-cutting cycles since 2000 and their market performance:

2001-2002: Dot-com bubble burst, rate cuts couldn’t save the day

Faced with slowing growth and the bursting of the tech bubble, the Fed began cutting rates in January 2001. However, corporate earnings expectations were sharply lowered, tech stocks were overvalued, and market confidence collapsed.

Data speaks volumes: Nasdaq fell from 5048 in March 2000 to 1114 in October 2002, a decline of 78%; the S&P 500 dropped from 1520 to 777, a decline of about 49%. Despite frequent rate cuts, market pessimism persisted.

2007-2008: Financial crisis hits, monetary policy fails

Between 2004-2006, the Fed raised rates from 1% to 5.25% to curb housing overheating. But in September 2007, the subprime crisis erupted, banks collapsed, and credit markets froze.

Although the Fed implemented emergency rate cuts, the economy was already in recession: unemployment rose, bankruptcies surged, and consumption shrank. The S&P 500 plunged from 1565 in October 2007 to 676 in March 2009, a decline of nearly 57%; the Dow Jones Industrial Average fell from 14,164 to 6,547, a drop of about 54%. This time, rate cuts had limited effect.

2019: Preemptive rate cuts spark stock market rally

In July 2019, concerned about global slowdown and trade uncertainties, the Fed took preemptive rate cuts. The market interpreted this as a positive signal of continued economic support.

Meanwhile, corporate profits remained stable, the tech sector showed strong momentum, and trade negotiations between China and the U.S. made progress. The result? The S&P 500 rose about 29% for the year, from 2507 to 3230; the Nasdaq surged 35%, from 6635 to 8973. This time, rate cuts fueled a real bull market.

2020: Unconventional measures amid pandemic shock

The COVID-19 pandemic caused a sudden halt to global economic activity. The S&P 500 plummeted from 3386 in February to 2237 in March, a decline of 34%.

In March, the Fed quickly launched two emergency rate cuts, bringing rates down to 0-0.25%, and initiated quantitative easing. Massive liquidity injections, vaccine development progress, and economic recovery expectations drove the market rebound. The S&P 500 recovered to 3756 by year-end, up 16%; Nasdaq gained 44%. This time, unconventional policies saved the market.

Below is a comparison table of previous rate-cutting cycles:

Who Are the Winners of Rate Cuts?

The impact of rate cuts varies greatly across industries, directly affecting investment opportunities.

Tech stocks are the biggest beneficiaries. Low interest rates increase the present value of future cash flows for tech companies and reduce financing costs, encouraging R&D and expansion. Historical data shows that during the 2019 rate-cut cycle, tech stocks rose 25%, and during the emergency cuts in 2020, they surged 50%. In contrast, tech stocks declined 5% during the 2001 bubble burst and fell 25% during the 2008 financial crisis.

Consumer discretionary and healthcare sectors perform steadily. Rate cuts boost consumer purchasing power and promote optional consumption. These sectors rose 18% and 12% respectively in 2019, and in 2020, they gained 40% and 25%.

Financial stocks are the most “confusing.” Initially, lower rates compress net interest margins, hurting bank profits. Financial stocks barely rose 8% in 2001, but plunged 40% during the 2008 crisis. However, as economic recovery expectations strengthen, financial stocks tend to rebound, rising 15% in 2019 and 10% in 2020.

Energy stocks are the most volatile. Economic growth boosts energy demand, but oil price fluctuations and geopolitical risks add uncertainty. In 2019, energy stocks rose only 5%, and in 2020, they declined 5%. In comparison, they rose 9% in 2001.

Complete industry performance benchmarks:

How to Navigate the 2024 U.S. Rate Cut Pace?

According to the Fed’s schedule, there are two key meetings in 2024: November 7 and December 18. Fed Chair Powell stated on September 30 that the Fed is not in a hurry to cut rates rapidly and expects two more cuts this year, totaling 50 bps.

Market consensus suggests a traditional pace of 25 bps cuts in November and December. However, investors should closely monitor economic data—if the labor market worsens further or manufacturing continues to contract, the rate cut pace may accelerate; otherwise, it may remain unchanged.

The Double-Edged Sword of Rate Cuts: Benefits and Risks

Economic benefits of rate cuts: Lower borrowing costs encourage consumers and businesses to spend more now. For debt-laden households and companies, interest burdens ease, improving cash flow. The financial system gains liquidity support, reducing systemic risks.

Potential risks of rate cuts: Excessive cuts may trigger asset bubbles, as low rates encourage over-borrowing, leading to high leverage among households and firms in the long run. Most critically, if the economy fails to recover as expected, the liquidity from rate cuts could turn into inflationary pressures, creating a stagflation scenario.

The current market consensus expects a soft landing, but some warn that rising energy costs, port strikes, and geopolitical risks could be more severe than anticipated. The latest MLIVPulse survey shows 60% of respondents are optimistic about U.S. stocks in Q4, and 59% prefer emerging markets. Traditional safe-haven assets like U.S. Treasuries and the dollar are cooling off.

Overall, the outcome of the stock market under U.S. rate cuts depends on whether the cuts truly stimulate economic recovery. If corporate earnings remain stable or grow, stocks will rebound; if a recession becomes unavoidable, rate cuts may not be enough. The most important thing now is to select industries and assets with higher growth potential in a low-interest-rate environment.