When Fed Interest Rate Cuts Begin With Stock Markets Near All-time Highs, What Happens Next?
- Kyle Rolek, Retirement Planning Specialist
- Sep 17
- 3 min read
With the US Federal Reserve cutting interest rates yesterday, I thought some may be wondering how stock markets have performed in the 12 months following Fed interest rates cuts, particularly when the S&P 500 is within 2% of all-time highs as it is currently.
This short article will focus on the data.
Historical Data Chart
Historical Data Summary
Since 1980, the Federal Reserve has reduced interest rates with the S&P 500 within 2% of all-time highs 21 times (excluding the two most recent interest rate cuts that occurred on 11/7/24 and 9/17/25 which don't have 12 month performance data yet)
The S&P 500 index was positive 21 out of 21 times in the 12 months following interest rate cuts with the S&P 500 within 2% of an all-time high.
The S&P 500's average annual return has been +14% during these 12-mo time periods.
In summary, the 12 months following Federal Reserve interest rate cuts, particularly when the S&P 500 is already within 2% of all-time highs, has been a very positive time period for investment returns historically.
Why Interest Rate Cuts Can Stimulate Growth
Lower rates can benefit stock markets in several ways:
Reduced borrowing costs for companies, which can lower interest expense and increase access capital for companies to invest in ways that grow profits.
Reduced borrowing costs for individuals, which can decrease the amount of the household budget going to interest expense. This frees up new cash for consumption (which drives corporate profits) and investment (which can directly boost stock prices).
The Impact of Interest Rate Cuts on the Three Buckets
Your investment planning for retirement should have a healthy balance in several investment categories, each of which can be impacted by interest rate cuts.
The "short-term bucket" - This includes traditional savings accounts, checking accounts, and money market funds. The primary purpose of this bucket is stability and liquidity.
One of the primary downsides of Federal Reserve interest rate cuts is that banks are likely to reduce interest rates on savings accounts as the fed funds rate falls.
Interest rate cuts may reduce interest expense on credit cards, home equity line of credits, and other variable rate loans which is a positive. But it will also reduce the interest earned on savings accounts.
The "middle bucket" - This includes investments like money market funds within retirement accounts, bonds, bond funds, and CDs. The primary purpose of this bucket is stability to be able to fund disbursements without being forced to sell stock funds when markets are down.
Similarly to savings accounts, the interest rates paid by money market funds, bonds, bond funds, and CDs are likely to decline as interest rates fall (although bonds and CDs may have fixed rates for a certain time period).
The "long-term bucket" - This primarily includes well-diversified stock funds and stocks. The primary purpose of this bucket is long-term growth to beat inflation.
As a the data above shows, interest rate cuts have historically been positive for stock values due to lower borrowing costs both for companies and individuals. Although there's certainly no guarantee the trend continues, history says the odds of positive performance over the next 12 months are favorable.
By having a well balanced investment plan with an appropriate amount in each bucket for your specific cash flow needs, you can protect yourself from needing to sell stock funds in bad times to cover expenses, while also benefiting from strong returns during good times which helps protecting your purchasing power from inflation for many years to come.
Capturing growth in periods when markets are doing well, which protects from inflation, is equally as important as protecting yourself from needing to sell at bad times when markets aren't doing well.
Maintaining appropriate balance between protection and growth is essential towards accomplishing the goal of remaining financially secure for life.
Want To Discuss This Individually?
1 - For clients: Call or email me any time as always.
2 - For non-clients: Complete the form on the website to request a retirement planning consultation: www.rolekretirement.com
This is article is for informational purposes only and should not be considered as tax or legal advice. Advice is only provided after entering into an Advisory Agreement with the Advisor. See other disclosure here: Disclosures