The Federal Reserve is cutting interest rates! Which stocks are the most favored in this wave of market?

September 18, the Federal Reserve announced a 50 basis point cut in the federal funds rate to the 4.75%-5.00% range, marking the first rate cut since March 2020. The market is buzzing—some anticipate a new bull market, while others worry about a recession. So, the question is: Is a rate cut really good for the stock market or is it a trap? How will stocks in different sectors perform?

Why cut rates now?

Simply put, the economy is a bit sluggish. The unemployment rate has risen from 3.80% in March this year to 4.30% in July, triggering a “recession warning.” Manufacturing PMI has been in contraction for five consecutive months, and the Fed has even lowered this year’s GDP forecast from 2.1% to 2.0%.

The core logic behind rate cuts boils down to five reasons: economic slowdown needs stimulation, deflation needs to be hedged, financial markets require liquidity amid instability, external pressures need buffering, and emergency situations (pandemics, disasters) require quick action. This rate cut by the Fed is mainly to reassure the economy and labor market and to cool down manufacturing.

What does history tell us?

According to data from Goldman Sachs macro strategist, since the mid-1980s, the Fed has implemented 10 rounds of rate cuts. The key takeaway is: When rate cuts successfully prevent a recession, stocks usually rise; when they fail to prevent a recession, stocks tend to fall.

Let’s look at some real cases:

2001-2002 Internet Bubble: The Fed cut rates sharply, but the tech bubble was already deeply rooted. The Nasdaq plummeted from 5048 to 1114 (down 78%), and the S&P 500 from 1520 to 777 (down 49%). The rate cut remedy failed.

2007-2008 Financial Crisis: Subprime crisis erupted, banks failed, credit froze. The S&P 500 dropped from 1565 to 676 (down 57%), and the Dow Jones from 14164 to 6547 (down 54%). Despite rate cuts, the financial tsunami couldn’t be stopped.

2019 Preemptive Rate Cut: This was a success. Seeing signs of global slowdown, the Fed acted early. Market confidence surged, corporate profits remained stable, tech stocks soared, and trade tensions eased. As a result, the S&P 500 rose 29% for the year (from 2507 to 3230), and Nasdaq increased 35% (from 6635 to 8973).

2020 Emergency Rate Cut: The S&P 500 fell from 3386 to 2237, then the Fed stepped in with an emergency cut to 0-0.25%, launching QE. Liquidity flooded in, benefiting tech companies, and vaccine hopes boosted confidence. The S&P 500 rebounded to 3756 (up 16% for the year), and Nasdaq rose 44%.

Who benefits most from rate cuts in 2024?

Based on past industry performance during rate-cut cycles, different sectors perform very differently:

Tech stocks: In 2001, they performed modestly (-5%), but in 2019, they rose 25%, and in 2020, surged 50%. Why? Low interest rates increase the discounted value of future earnings for tech firms, reduce financing costs, and boost R&D and expansion. When economic signals turn positive, tech stocks lead the way.

Financial stocks: They are more cyclical. Initially, during rate cuts, net interest margins narrow, squeezing bank profits, leading to a 40% decline in 2007-2008. But once economic recovery expectations rise, financial stocks rebound—2019 saw a 15% increase. This sector’s performance depends heavily on economic cycles.

Healthcare and Consumer Discretionary: These sectors tend to grow steadily during rate-cut periods. Cheaper borrowing encourages consumer spending, benefiting these sectors. In 2020, consumer discretionary stocks jumped 40%.

Energy stocks: The most volatile, with swings from 9% in 2001, 5% in 2019, to -5% in 2020. Energy is highly sensitive to economic cycles (more activity = higher demand) and is also affected by oil prices and geopolitical factors.

Will there be more rate cuts in 2024?

Fed Chair Powell stated at the end of September that there’s no rush to cut rates quickly, and there may be two more cuts totaling 50 basis points this year. Markets expect a 25 basis point cut at each of the November and December FOMC meetings. In other words, there are two more favorable windows before year-end.

Pros and cons of rate cuts

Advantages: Borrowing becomes cheaper, boosting consumption and investment; debt-servicing costs for households and businesses decrease; liquidity in the financial system is ample; risks are relatively mitigated.

Disadvantages: It can lead to excessive consumption and investment, fueling inflation; asset bubbles may form; prolonged over-borrowing could pile up financial risks.

Currently, markets generally expect a “soft landing” (growth slowdown without recession), but risks like rising energy costs, port strikes, and geopolitical conflicts remain. According to recent surveys, 60% of investors are optimistic about US stocks in Q4, and 59% favor emerging markets.

Key conclusion: Whether rate cuts are good or bad depends on whether the economy can achieve a soft landing. If successful, tech and consumer stocks will be the first to rally; if not, all stocks could decline. In the current rate-cutting stock market, paying close attention to economic data remains the key.