SUMMARY
US interest-rate cuts at market highs have typically given way to stronger equity performance. Potential gains may not be confined to US stocks, though.
KEY TAKEAWAYS:
The Fed may follow up with further interest-rate cuts in the coming months
Rate cuts at previous S&P 500 highs have typically pointed to one-year market upside
Policy divergence adds fuel to the weaker US dollar trade
Further weakness in the US currency could drive emerging market outperformance
What to make of the Federal Reserve’s reduction in interest rates from 4.5% to 4.25% on September 17?
According to the Fed, the move was a “risk management cut.” Recent jobs data has been weak, and the US central bank sees a risk that it might worsen further.
That said, the US economy is still growing briskly. What’s more, core inflation seems stuck at around 3%. So, the cut itself creates potential hazards.
For example, cheaper borrowing costs in a broadly resilient economy could lead companies and individuals to take on more debt than they otherwise might. Economic growth could end up overheating.
As it stands, the Fed has indicated that it might do further cuts of 25 basis points apiece in October and December.
So, how might the stock market respond?
Rate cuts with the S&P 500 at record highs
Interest rate cuts have often come at much worse times for the economy and stock market.
Today, growth is decent, and the S&P 500 Index stands around its all-time high.
This isn’t unprecedented, though. We counted thirteen previous occasions since 1980 when the Fed lowered rates when the stock market was within 1% of its record peak.
And these cuts were followed by positive one-year returns in every case – figure 1. The average return has been 14.7% and the median 17.5%.
Over time, the typical one-year return in the S&P 500 has been an average of 10.4% and a median of 11.9%.
Figure 1. Interest rate cuts at record highs
Date of first cut |
1-yr S&P 500 return (%) |
|---|---|
| 5/21/1985 | 24.16% |
| 12/17/1985 | 17.52% |
| 03/07/1986 | 27.81% |
| 4/21/1986 | 19.75% |
| 7/26/1989 | 5.28% |
| 7/13/1990 | 4.11% |
| 03/08/1991 | 8.07% |
| 08/06/1991 | 7.67% |
| 07/06/1995 | 17.79% |
| 1/31/1996 | 23.61% |
| 9/18/2019 | 10.40% |
| 10/30/2019 | 7.33% |
| 9/18/2024 | 17.46% |
| 11/07/2024 | - |
| Average | 14.69% |
| Median | 17.46% |
Source: Bloomberg as of September 17, 2025. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary.
Last September, the Fed also cut rates with the market at record highs. Since then, returns have been almost exactly in line with the historical median, at 17.5%.
In sum, over longer time horizons, new all-time highs tend to beget new all-time highs when the Federal Reserve is reducing interest rates.
Why the US dollar may weaken more
The Fed’s latest rate cut could well put further downward pressure on the US dollar.
The gap between US 10-year Treasury yields and those on Chinese and German bonds has been shrinking this year. In other words, the additional yield on US bonds over other countries has become less generous.
This has already seen the US dollar depreciate in 2025 – and the process may have further to run.
The Fed is widely seen reducing interest rates further in the coming months, with some advocating for more aggressive easing. Against this backdrop, Citi Research believes the US dollar will weaken into year-end.
Falling US rates and a cheaper dollar mean that monetary conditions globally are likely to loosen further.
In the past, this has seen strength for the likes of the Brazilian real, Mexican peso, and South African rand, to name a few.
It has also boosted such nations’ stock markets, when viewed in US dollar terms.
So, we are evaluating whether further Fed rate cuts could potentially set up a spell of emerging equity market outperformance.
