When rates fall, equities often rise—
here’s what history shows

Key takeaways:

• There's a growing divergence in the stock market, where momentum is fueled less by fundamentals and more by behavioral dynamics.
• In a market increasingly driven by sharp swings in sentiment, staying grounded in investing fundamentals is more important than ever.

09/10/2025 – All signs from the Federal Reserve point toward a rate cut at the next FOMC meeting on September 17—potentially resuming the monetary easing cycle that began in September 2024. Since then, the S&P 500^® Index has returned 17%, prompting investors to ask: Has the market already priced in the benefits of lower rates?

Lower short-term rates have both technical and fundamental implications. They reduce borrowing costs for companies, which can boost profitability and spur investment. Rate cuts also support valuations, as lower yields make equities more attractive relative to bonds and help justify higher multiples. Historically, earnings have risen modestly during rate-cutting cycles that weren’t tied to recessions—such as in the mid-1980s and mid-1990s. Yet equity markets surged during those periods.

The chart above shows how stocks (as measured by the S&P 500^®) have performed across different phases of past interest rate cycles. On average, stocks delivered annualized returns of around 20% when rates were falling.

Typically, economically sensitive sectors lead during easing cycles—think financials, industrials, consumer discretionary, and small caps. Given the performance and valuation gap between large-cap tech and these cyclical sectors, the latter have shown relative strength in recent months. If expectations for Fed rate cuts continue to build, these stocks may have room to run.

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