When the Federal Reserve cuts interest rates, the stock market does not respond in a consistent pattern.
U.S. stock investors may be able to stop obsessing over when the Federal Reserve will cut rates and by how much. This is because the stock market does not respond consistently to Federal Reserve rate cuts: sometimes the market rises after a cut, and sometimes it does not, with no difference in response compared to the long-term average returns.
The chart below focuses on all Federal Reserve rate cuts since 1980 (since 1980, the Federal Reserve began announcing target rates after meetings of the rate-setting committee), comparing the average returns of the Wilshire 5000 Index on all trading days with the average returns in the following three scenarios: (a) the first rate cut after a rate-hiking cycle; (b) the fourth rate cut of a rate-cutting cycle (since the next rate cut by the Federal Reserve will be the fourth of the current cycle); (c) all rate cuts.
The results show that the average returns of the stock market on all trading days lead in the 1-month, 6-month, and 12-month cycles but lag in the 3-month cycle. However, all differences shown in the chart are not significant at the commonly used 95% confidence level among statisticians, meaning no true patterns can be proven.
This statistical insignificance may partially stem from the smaller sample sizes of some categories in the chart. To draw more statistically robust conclusions, MarketWatch regular contributor Mark Hulbert utilized the CME Group’s Federal Reserve watch tool, which “calculates the probabilities of Federal Reserve rate changes based on 30-day federal funds futures prices.”
Hulbert focused on the market’s expectations for the Federal Reserve meeting in December 2025. The CME Group released daily changes in the probabilities of different target federal funds rates over the past eight months, and he measured the relationship between these daily changes in probabilities and the daily changes in the S&P 500 Index. The results show a statistically significant correlation, but the direction is contrary to most investors’ expectations: when the Federal Reserve watch tool predicts higher rates in December 2025, the S&P 500 Index tends to perform better on that day.
This result may be surprising, but when interest rate expectations rise and the stock market increases, it may reflect the market’s belief that the U.S. economy will remain strong, which is why higher rates may be net bullish for the stock market.
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