Will U.S. Stocks Rise or Fall After the Fed Cuts Rates?
The Federal Reserve is set to meet this Tuesday and Wednesday to discuss its next move on interest rates. Tom Lee, the research head at Fundstrat, predicted that after a major rate decision on Wednesday, U.S. stocks could see a rebound over the following weeks.
First Rate Cut in Four Years
The market expects the Fed to cut rates by 25 or 50 basis points, marking its first rate cut in four years. Given the supportive inflation data and the need for labor market support, this could boost market confidence.
Lee believed the stock market will perform well during and shortly after the meeting.
For months, Wall Street has anticipated a rate cut, especially as signs of economic weakness have emerged due to tighter financial conditions.
According to the U.S. Bureau of Labor Statistics, while economic growth remains strong, the job market is gradually slowing, with new hires in July down 3.7% from last year.
The Chicago Mercantile Exchange's FedWatch tool suggested a 61% chance of a 50-basis-point cut this Wednesday. However, Lee argued that as long as the Fed signals further rate cuts, the stock market should rise.
Lee’s predictions for the stock market were spot on last year, and he expectes a strong performance in 2025. He believes that after the presidential election, volatility will settle, creating opportunities for the market to shine again. Investors should be confident in the coming year, despite potential turbulence in the short term.
The Most Crucial Driver for Stocks
Goldman Sachs analysts, however, caution that the importance of Fed policy rates on U.S. stocks has diminished due to economic uncertainties. David Kostin from Goldman Sachs noted in a September 13 report:
“While some investors see the pace of Fed rate cuts as a key factor for stock returns in the coming months, economic growth trends are ultimately the most crucial driver for stocks.
If the market reflects minimal impact from Fed easing, stocks could still rise despite higher bond yields. Conversely, if the market expects further Fed easing due to worsening economic data, stocks might struggle even with falling bond yields.”
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