The Federal Reserve's interest rate cut cycle is coming. Which stocks are most likely to rise with the trend?

September 18, the Federal Reserve announced a significant 50 basis point cut in the federal funds rate, setting it between 4.75% and 5.00%. This is the first rate cut since the outbreak of the pandemic in March 2020, marking the end of a prolonged tightening cycle and the beginning of an era of loose monetary policy. The 50 basis point reduction exceeded market expectations and also reflected the actual pressures faced by the US economy.

Is the impact of rate cuts on the stock market ultimately beneficial or detrimental? How should investors seize opportunities in the future? This article will analyze the logic behind stock market performance during rate cut cycles, review the market impacts of the four previous rate cuts this century, and identify which industries and stock types are more likely to stand out in a loose environment.

Why do central banks open the door to rate cuts?

Behind interest rate adjustments often lie deep signals about economic operation. Generally, the main reasons central banks consider lowering rates include:

Weak economic growth: When GDP growth slows, unemployment rises, and corporate investment is insufficient, lowering interest rates can reduce financing costs and stimulate corporate expansion. As borrowing costs decrease, the threshold for large consumer expenditures (home purchases, car buying) also lowers, thereby boosting the overall economy.

Preventing deflation risks: Persistent falling prices and slowing money circulation often indicate insufficient economic vitality. Increasing the money supply and lowering rates can enhance liquidity, stabilize prices, and promote recovery.

Financial market turbulence: During crises, central banks cut rates to inject liquidity into the market, preventing credit crunches and systemic risks.

External economic shocks: If external factors such as slowing global growth or escalating trade frictions threaten the domestic economy, central banks may preemptively cut rates to strengthen resilience.

Responding to emergencies: In cases of pandemics, natural disasters, and other emergencies, central banks adopt unconventional measures to support the economy.

The trigger for this round of US rate cuts was: the unemployment rate rose from 3.80% in March 2024 to 4.30% in July for four consecutive months, triggering recession warning signals. Meanwhile, manufacturing PMI has been in contraction for five consecutive months, and the Fed has lowered its GDP growth forecast for this year from 2.1% to 2.0%. These indicators collectively point to an economic slowdown.

Historical review: rate cuts ≠ stock market necessarily rising

A common misconception in financial history is that rate cuts inevitably lead to stock market rallies. In reality, the impact of rate cuts on the stock market depends on multiple variables.

Goldman Sachs research indicates that since the mid-1980s, the Fed has implemented 10 rate cut cycles, of which 4 were accompanied by recessions and 6 were not. The key distinction is: when the Fed successfully prevents a recession, stocks tend to rise; when a recession becomes unavoidable, the effectiveness of rate cuts is limited.

2001-2002: Rate cuts during the bubble burst also failed to reverse the decline

After the dot-com bubble burst in 2000, the Fed began a series of rate cuts in January 2001. However, deteriorating corporate earnings and overvalued tech stocks’ fundamentals could not be remedied by low interest rates. As a result, the Nasdaq index fell from 5048 points in March 2000 to 1114 points in October 2002, a decline of 78%; the S&P 500 also dropped from 1520 to 777 points, about a 49% decrease. Market confidence shattered, and rate cuts proved ineffective.

2007-2008: Rate cuts during the subprime crisis were like a drop in the bucket

Between 2004 and 2006, the Fed raised rates from 1% to 5.25% to curb housing overheating. But in 2007, the subprime crisis erupted, banks collapsed, and credit markets froze. Despite aggressive rate cuts, the economy had already fallen into a deep recession, with bankruptcies, high unemployment, and reduced consumption. Rate cuts could not turn the tide. The S&P 500 plummeted from 1565 to 676 points, a 57% decline.

2019: Preemptive rate cuts supported new highs

The story in 2019 was quite different. The Fed started rate cuts before the economy entered recession, viewed as preemptive support. Coupled with stable corporate profits, strong tech growth, and easing US-China trade tensions, the S&P 500 rose about 29% for the year, from 2507 to 3230 points; the Nasdaq surged 35%, from 6635 to 8973 points.

2020: Unconventional measures amid pandemic shock

The pandemic caused global economic stagnation, with the S&P 500 dropping 34% from its February high of 2237 points in March. The Fed quickly cut rates to 0-0.25% and launched quantitative easing. Massive liquidity injections, combined with vaccine optimism, pushed the S&P 500 back to 3756 points by year-end, a 16% increase; the Nasdaq soared 44%.

Performance of stock markets during the four rate cut cycles:

Which industries are most favored during rate cut cycles?

Empirical data shows that different industries perform very differently in a loose environment.

Technology stocks are the biggest winners. Low interest rates increase the present value of future cash flows, and tech companies are precisely the ones with the most promising cash flow commitments. Additionally, lower financing costs encourage R&D investments. During the 2019 and 2020 rate cut cycles, tech stocks gained 25% and 50%, respectively, far surpassing other sectors.

Financial sector is a double-edged sword. In the short term, rate cuts narrow banks’ net interest margins (reducing profitability), but as economic recovery expectations rise, loan demand increases, and financial stocks tend to rebound later.

Healthcare and consumer discretionary sectors usually trend steadily upward. These industries benefit from increased consumer spending, with relatively stable returns during rate cut cycles.

Energy sector performance is most unpredictable. Economic recovery boosts energy demand, but oil price volatility and geopolitical risks often offset each other, leading to high uncertainty for the sector.

Performance of various sectors in the 12 months after rate cut initiation:

Outlook and timeline for rate cuts in 2024

After announcing a 50 basis point cut on September 18, Fed Chair Powell stated on September 30 that the central bank would not rush to cut rates quickly and expects to cut another 50 basis points this year (in two steps). Market expectations are that the Federal Open Market Committee (FOMC) will each cut 25 basis points at its meetings on November 7 and December 18.

This implies that the total rate cut for the year is basically set at 100 basis points, allowing investors to adjust asset allocations and investment timelines accordingly.

Pros and cons of rate cuts

Benefits of rate cuts: Lower borrowing costs stimulate corporate and household investment and consumption, promoting economic growth. Debt-servicing costs for households and businesses decrease, improving cash flow and easing living pressures. Financial system liquidity is ample, reducing systemic risks.

Hidden risks of rate cuts: Excess liquidity may trigger asset bubbles and inflation. When the economy overheats, prices rise, and living costs increase. Low interest rates encourage excessive borrowing, leading to long-term accumulation of household and corporate debt, creating financial vulnerabilities. If policies reverse or the economy worsens, the risk of bubbles bursting sharply increases.

Currently, markets generally expect the US economy to achieve a soft landing, but uncertainties such as inflation rebound, port strikes, and geopolitical conflicts still warrant caution. For investors, during a rate cut cycle, focus on high-growth sectors like technology, closely monitor economic data and policy signals, and remain flexible in responding to market changes.