The US interest rate cuts are here. Will the stock market go up or down? Four key points investors must read

September 18th, the U.S. Federal Reserve announced a 50 basis point rate cut, marking the first rate cut since March 2020, which also sparked widespread attention from global investors. But history tells us that rate cuts are not always a signal of rising stock markets—the key lies in the economic conditions behind the rate cut.

Why are the effects of the US rate cut so significant? The logic investors need to understand

Why does the Federal Reserve cut interest rates? On the surface, it appears to be “monetary easing,” but fundamentally, it reflects changes in economic conditions.

When unemployment begins to rise, manufacturing contracts, and economic growth stalls, the central bank opts to cut rates to stimulate economic recovery. Taking this round of rate cuts as an example, the U.S. unemployment rate rose from 3.80% in March 2024 to 4.30% in July, and the ISM Manufacturing PMI has been in contraction for five consecutive months. These data triggered the Fed’s “recession warning” mechanism.

But here’s a question: Rate cuts themselves do not determine whether the stock market rises or falls—economic outlook does.

Historical mirror: Four rate cuts, four different stock market outcomes

Research by Goldman Sachs macro strategist Vickie Chang found that since the mid-1980s, the Fed has implemented 10 rounds of rate cuts. The key discovery is: When rate cuts successfully prevent a recession, stocks rise; when a recession is hard to avoid, stocks fall.

2001-2002: Bubble burst that even rate cuts couldn’t save

During the dot-com bubble burst, the Fed quickly cut rates, but corporate earnings expectations collapsed, and market confidence disintegrated. Nasdaq fell from 5048 to 1114 points, a 78% decline; the S&P 500 dropped from 1520 to 777 points, a 49% decline. Rate policies were powerless here.

2007-2008: Powerlessness during the financial crisis

The subprime crisis erupted, and the Fed implemented large rate cuts, but the economy entered recession, unemployment soared, and credit froze. The S&P 500 plummeted from 1565 to 676 points, a 57% decline. Even with zero interest rates, reversing the situation quickly was difficult.

2019: The victory of preemptive rate cuts

The Fed, considering global economic slowdown and trade uncertainties, adopted preemptive rate cuts. At this time, corporate profits were stable, the tech sector was strong, and progress was made in US-China trade negotiations. The result was the S&P 500 rose 29% for the year, and Nasdaq increased 35%, hitting record highs.

2020: Unconventional rescue amid the pandemic

Market panic triggered by the pandemic caused the S&P 500 to plunge 34%. The Fed emergency cut rates to zero and launched quantitative easing, injecting massive liquidity into the market. Tech companies rode the wave of digitalization, and by year-end, the S&P 500 rebounded to 3756 points, up 16% for the year; Nasdaq rose 44%.

The pattern in these four cases is clear: Rate cuts only promote stock market gains when the economy shows signs of recovery and corporate profits are stable.

How will the US rate cut impact the stock market outlook in 2024?

The market generally expects the US economy to achieve a “soft landing”—avoiding recession while controlling inflation. But warning signs are worth noting: rising energy costs, port labor disputes, global geopolitical conflicts, and other instability factors.

According to the latest MLIVPulse survey, 60% of respondents are optimistic about the US stock market performance in Q4, and 59% prefer emerging markets over developed markets. This reflects some confidence in economic recovery but also diversification in asset allocation.

Who are the winners during a rate cut cycle? Which industries are more likely to benefit?

Different industries perform very differently during a rate cut cycle. Based on data from the past 24 years:

Technology sector is the biggest winner. Low interest rates increase the present value of future earnings for tech companies and reduce financing costs, encouraging R&D investment. During the 2020 rate cut cycle, tech stocks gained 50%; in 2019, they rose 25%.

Consumer discretionary performs steadily. Rate cuts boost consumer spending, as people are more willing to make large purchases (homes, cars, electronics). After the 2020 rate cut, this sector rose 40%; in 2019, it increased 18%.

Healthcare remains relatively stable, as it is less affected by economic cycles and benefits from increased consumption. Over the past four rate cut cycles, it averaged gains of 12-25%.

Financial sector faces short-term pain. Rate cuts narrow banks’ net interest margins, impacting profitability. During the 2007-2008 financial crisis, it even fell 40%. But as economic recovery expectations rise, financial stocks are expected to rebound.

Energy sector is the most unstable. Economic recovery increases energy demand, but oil price volatility and geopolitical factors create significant uncertainty. The 2020 decline of 5% is a typical example.

How many more rate cuts are possible in 2024?

Federal Reserve Chair Powell stated on September 30 that the Fed is not in a hurry to cut rates rapidly, and there may be two more rate cuts this year, totaling 50 basis points. This suggests that in the November and December meetings, the Fed might each cut rates by 25 basis points.

The double-edged sword of rate cuts: benefits and risks

Benefits of rate cuts: Lower borrowing costs, increased consumption and investment, reduced debt burdens for households and businesses, and improved liquidity in the financial system.

Risks of rate cuts: Prolonged low interest rates may trigger excessive consumption and investment, leading to inflation or asset bubbles. When bubbles burst, over-indebted households and businesses can trigger financial crises.

Implications for investors: US rate cuts impact both macroeconomic outlooks and sector performance differentiation. During a rate cut cycle, judging whether the economy is truly recovering is more important than chasing gains—because only a rally supported by economic fundamentals is sustainable.