Will Fed Cuts Fuel A Stock Rally?
September 17, 2025
As anticipated, the Federal Reserve (Fed) lowered its target federal funds rate by a quarter point this week and signaled two additional cuts later this year, marking another step in its rate-cutting cycle. The Fed chose the more measured approach with the quarter point cut. The real focus now turns to its outlook for the job market and inflation over the coming quarters, as well as how the Fed’s decision-making may evolve with changes in its leadership.
The Fed also released its summary of economic projections and the closely watched “dot plot,” offering insights into how members of the Federal Open Market Committee (FOMC) see the economy and rates developing in the years ahead. With slowing job growth and limited upward pressure on inflation, markets are parsing the details carefully.
How Stocks Might React
While discussions about the size and pace of future rate cuts take place, the more practical question for investors is how stocks may respond. This week also marked the one-year anniversary of the first Fed rate cut of this cycle, it’s timely to look at how equities have historically performed during year two of cutting cycles.
Source: LPL Research, Bloomberg, Federal Reserve 09/16/25.
Disclosures: All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.
Most of these numbers in the data collected are above zero for both the first year and second year of historical rate-cutting cycles from the past 50 years.
- The average gain during year one was 9.6%, and the median was 16.4%.
- The average and median gains in year two were excellent at 16.4% and 14.4%, respectively.
Economic Environment Is Key
These are excellent historical returns; however, as the accompanying chart illustrates, stocks fell during some of these cycles. Stocks fell during the 1980–81 cycles (double-dip recession), the 2001 cycle (recession), and the 2007 cutting cycle (recession). In other words, if stocks are going to rise over the next 12 months, it will likely require economic growth to continue.
LPL Research remains optimistic about the market following the Fed’s rate cut, supported by a favorable backdrop of stable interest rates, cooling inflation, fiscal stimulus, ongoing strength in artificial intelligence investment, productivity gains, and the potential for additional rate cuts ahead.
That said, the macroeconomic outlook is far from assured. Deficit spending may put upward pressure on long-term interest rates. A stalled job market may spark recession fears. Legal challenges to tariffs bring uncertainty. The geopolitical landscape is fraught with risks. With stock valuations elevated, it’s possible that stocks produce lackluster returns even in a favorable economic environment.
In Summary
The first year of this rate-cutting cycle has been excellent for stocks, and history offers a reason for optimism as the cycle continues. Year two of rate-cutting cycles has historically delivered solid gains for stocks — provided the economy avoids a recession. Markets like rate cuts that are a luxury, not an emergency. With the Fed likely to signal more easing ahead, and near-term recession risk seemingly low, the backdrop for stocks remains constructive.
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Disclosures:
All indexes are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This Research material was prepared by LPL Financial, LLC, FactSet.