If history is any indication, the Federal Reserve’s imminent rate cut could provide an electric jolt to the already high-flying S&P 500 over the next year.

Federal Reserve Chair Jerome Powell has all but confirmed that the central bank will announce a rate cut tomorrow. But whether the Fed will slash rates by 25 basis points, 50, or even 75 as some are calling for, is still an open question.

Powell is hoping to replicate Alan Greenspan’s victorious soft landing back in 1995, when the Fed then lowered rates amid a soaring stock market. To pull it off, Powell is relying on strong corporate profits and a resilient consumer to buoy the economy and protect it from a rate-cut-induced tailspin.

Stocks love rate cuts

The S&P 500, Treasurys, and gold all tend to rise when the Fed lowers rates, according to a Bloomberg analysis tracking rate cuts since 1989. In fact, the S&P 500 rose an average of 13% in the six months following a rate cut during years where there was no recession.

Turning the clock back even further, the short-, medium-, and long-term market returns after a rate cut are impressive.

“During the five cutting cycles since 1984 where the economy did not quickly enter a recession, the S&P 500 typically returned +6% during the three months, +9% during the six months, and +17% during the 12 months after the first Fed cut,” Goldman Sachs Chief US Equity Strategist David Kostin wrote in a recent note.

Going back even further, since 1980, after each of the 20 times the Fed cut rates with stocks near all-time highs, the S&P 500 was higher a year later, according to Chief Market Strategist at the Carson Group Ryan Detrick.

However, past performance doesn’t guarantee future results. After all, the slowing labor market is an ominous macro indication that things won’t be simple this time around.

And the presidential election this year is a wild card that differentiates this easing cycle from past soft landings. Given the highly charged rhetoric and varying economic policies proposed, the market will likely remain volatile heading into November.

So, while it’s too soon to declare victory quite yet, right now the Powell plane looks all clear for soft landing.—LB

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🟢 What’s up

• Intel can’t stop, won’t stop: It rose 2.68% after announcing it will break its foundry business into a separate entity, which should go a long way to helping out the struggling chipmaker.
• Microsoft rose a tepid 0.88%, in spite of positive news: The company is raising its dividend and kicking off a new share repurchasing program.
• Hewlett Packard Enterprise rounded out the old-school tech giants breaking to the upside, rising 5.69% after Bank of America analysts upgraded the stock from “Neutral” to “Buy.”
• Flutter Entertainment, parent company of sports bettor FanDuel, popped 3.32% on the news that it’s buying Italian gambling company Snaitech S.A.
• Gannett Co. soared 18.74% thanks to an upgrade of the newspaper company from “Sell” to “Neutral” by Citi analysts.

What’s down

• Philip Morris International tumbled 2.14% after the tobacco titan sold its asthma inhaler maker Vectura Group for $198 million.
• Accenture sank 4.85% on the news that it will push promotions back from June all the way to December, implying cash flow problems for the consulting giant.
• Cigna fell 2.86% after Express Scripts, the healthcare giant’s pharmacy-benefits unit, sued the FTC over a recent drug pricing report.
• Trump Media & Technology Group dropped 6.60% after a judge ruled that the company must award one of its investors a large chunk of the stock in exchange for helping it go public.

As the Brew Markets X account (perhaps the greatest and best account on all of social media all over the world forever) pointed out, today’s US retail sales report came in stronger than expected.

According to the Commerce Department, retail sales rose 0.1% last month and 2.1% year over year. Consumer spending is a key part of the overall economy, and a healthy reading this month indicates that the economy is continuing to hum along, even as the Federal Reserve plans to cut interest rates.

The predominant question now is, how deep will those cuts be? Steady retail sales means that the Fed likely won’t feel the need to cut deeply in order to save the economy, so a good reading today could mean a smaller cut tomorrow.

Of all the many economic indicators that show life is just getting too expensive, high housing prices continue to be one of the stickiest—and most complicated to solve.

Over the past few years, the price of homes skyrocketed. Lofty mortgage rates and surging demand created a housing crisis in many parts of the US.

Now, on the eve of the Federal Reserve likely announcing its first rate cut since March 2020, would-be homebuyers are hopeful that lower rates will bring relief.

Since October 2023, 30-year fixed mortgage rates have dropped about 160 basis points to 6.2% today. While lower mortgage rates make buying a home more affordable, it’s also important to remember that the reason the Fed is cutting rates is because of a slowing economy—which hinders the housing market.

And even though lower borrowing rates will likely bring new buyers into the market, there is still the issue of supply. Many homeowners who locked in cheaper rates years ago aren’t selling anytime soon, and the supply/demand imbalance won’t be fixed simply by lower interest rates.

In addition, some homebuyers will probably keep waiting for rates to get even lower before they purchase a home. That’s why many economists don’t foresee there being a huge surge in home buying during the first few rate cut cycles.

How to invest in the housing market

All that being said, lower interest rates means lower mortgage rates, which should translate to increased demand for new homes in the coming years. That directly benefits homebuilder stocks, and the companies building homes know it: The National Association of Home Builders monthly confidence index rose for the first time in six months on the expectation of a rate cut.

Lower mortgage rates should also boost homebuilders because it makes it cheaper for them to borrow in order to fund construction.

To be clear, while homebuilding stocks will benefit from rate cuts, a lot of those gains have already been priced in, according to analysts. The S&P Homebuilders ETF (XHB), for example, has already jumped about 26% this year so far.

While analysts from RBC Capital believe stocks like Taylor Morrison Home, Toll Brothers, and Tri Pointe Homes have room to run even further, overall, the sector will have to rise to meet the high expectations investors already have. So while optimism is sweeping markets ahead of a rate cut, caution is still warranted.—LB

Not your average trading platform. Yep, there’s a new electronic options exchange in town, and it’s called MIAX Sapphire. MIAX operates four fully automated electronic options exchanges in the US, each with a distinct allocation and pricing model designed to meet specific client demands. Choose the trading tech of the future.

• Electric vehicle investors have one hope: Taylor Swift.
• The holiday shopping season is extraordinarily important for retailers, and a little-known wholesale inventories report provides some insight into what’s in store for holiday shoppers.
• No Spend September is the latest fad sweeping the world of finance, encouraging participants to cut non-essential spending all month. Do Instant Underpants count as essential?
• There are four phases of retirement—here’s how to invest for each of them.
• US & Chinese officials meet this week to discuss China’s economic woes and US tariffs.
• You won’t like what happens next: JP Morgan analysts believe that average annual returns for the S&P 500 will shrink to 5.7% over the next decade.

It’s the one we’ve all been waiting for: Tomorrow, the Federal Open Market Committee, the governing body of the Federal Reserve, is widely expected to announce the first interest rate cut since March 2020.

It’s been a long, wild ride to get here. At the beginning of the year, markets were pricing in (a now ridiculously high) six rate cuts. Those expectations were swiftly derailed when first-quarter inflation data revealed that higher prices were sticking around longer than anticipated.

Inflation has slowed since then, but a new concern replaced it: employment. The labor market has shown signs of cooling as of late, and the market freaked out in early August at the thought that the Fed had waited too long to cut rates to avoid a recession.

Tomorrow’s rate cut will likely fall somewhere between 25 and 50 basis points (keep reading to see which one Brew Markets readers think it will be). While it’s unclear how much of the cut is already priced into markets versus how big of a reaction stocks will have, one thing is clear: The wild ride is almost over.

Before the open

• General Mills (GIS) makes all your favorite cereals and snacks, which means this consumer staples company is pretty much recession-resistant. That provides shareholders with a lot of safety, if not much excitement—shares are up a tepid 12% in 2024, though the stock has gained some recent momentum as investors worried about lower consumer spending seek safety in staples. A solid dividend, clean balance sheet, and well-known brand round out this well-rounded investment. Consensus: $1.05 EPS, $4.79 billion in revenue

With rate cuts incoming, yesterday we asked Brew Markets readers to predict just how deep those cuts will be. It should come as no surprise that our readers are smart enough not to get overly excited by the hopes of a large cut, and instead are squarely in the 25 basis point camp.

• 0 bps: 1.4% of readers
• 25 bps: 79.6%
• 50 bps: 17.8%
• 75 bps: 1.2%
• 100 bps: Absolutely nobody

The CME FedWatch tool now says there’s nearly a two-in-three chance that tomorrow’s cut will be of the larger 50 bps variety, so clearly the market isn’t nearly as grounded and intelligent as our readers. Or, our readers are totally wrong. Tune in tomorrow to find out!