Q: The Federal Reserve is expected to cut interest rates at its upcoming meeting. If it does, will this send stocks rocketing higher?
Generally, a Federal Reserve rate cut is very well-received by the stock market, especially if it's done during a growing economy.
In fact, there have been six such rate cuts since 1971, and the stock market has rallied after every single one. On average, the stock market has risen 9.7% in the three-month period following a non-recession rate cut. If a similar outcome were to happen now, it would indeed send stocks to new highs.
However, there are two big caveats to keep in mind.
First of all, the futures markets are pricing in a 100% chance of at least one rate cut at the July Federal Open Market Committee meeting, so it's possible that the effects of a rate cut are already reflected in the current stock market. In fact, there's a roughly 30% chance of a double (50-basis-point) rate cut, so it's possible that stocks could actually fall a bit if it turns out there's just one.
Second, not all sectors benefit from interest rate cuts in the same way. In particular, banks tend to see profits fall when the Fed cuts rates, as it generally leads to shrinking margins. In fact, some of the big U.S. banks that have recently reported earnings, including JPMorgan Chase and Wells Fargo, have warned investors that rate cuts could hurt earnings for the rest of the year.
So while history is certainly on the side of a post-rate-cut market rally, that doesn't mean that it will necessarily happen this time or that all of your stocks will benefit.
