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After weeks of lukewarm macro data, political infighting, the erosion of the Fed’s independence, and a lot of Truth Social posts, it’s finally happened: The Federal Reserve greenlit a quarter-point rate cut.
We’ve discussed what that means for the broader economy—when the Fed cuts rates, it supercharges businesses by making borrowing far cheaper, juicing the economy—but what it means for investors is less straightforward.
Some strategists believe that a rate cut means a “wall of cash” will replace the market’s “wall of worry.” In other words, now that rate cuts have finally arrived, the $7 trillion that Americans have parked in money market funds will pour into the stock market and push stocks higher.
Some data backs up that reasoning: JPMorgan pointed out that, historically, when the Fed lowers borrowing costs at the same time the S&P 500 is within 1% of an all-time high (which it is now), the market gets a boost of roughly 15% over the next year.
Buy the rate-cut rumor, sell the news?
But many top strategists aren’t quite so optimistic. It may seem counterintuitive, but analysts from Morgan Stanley, Oppenheimer, and others are warning of a potential downturn after today’s rate cut announcement.
The reason is that a 25-point basis point cut might not substantially boost the beat-up labor market as much as hoped. Considering that so much of the S&P 500’s recent record run is about AI hype centered around a key few stocks, if increasingly pessimistic macro data keeps coming out despite the rate cut, that could turn sentiment negative fast.
“In the near term, the risk for equities is the tension between weak labor market data and a Fed that still appears focused on inflation risks from tariffs. What this means for equity investors is that the Fed could disappoint the markets' ‘need for speed’ in terms of rate cuts in the near term,” wrote Morgan Stanley CIO Mike Wilson this week.
That being said, most pros still have bullish year-end price targets, despite the market’s sky-high valuations: “We expect S&P 500 earnings per share to grow 8% this year and a further 7.5% in 2026, and we do not see any negative catalyst on the horizon that could drive a material derating,” wrote UBS CIO Ulrike Hoffmann-Burchardi today.
How to handle the uncertainty
It may not be smooth sailing ahead, but that doesn’t mean there’s no way to play the moment.
Citi analysts pointed to a group of stocks that are particularly sensitive to interest rate cuts, including DocuSign, Gap, EchoStar, and others, that could pop on today’s news. They also noted that small- and mid-cap stocks tend to benefit from rate cuts, as do growth investments. But that all depends on what happens next with the economy.
“The better the economic backdrop, the more attractive cyclicality and/or longer-duration risk assets become,” wrote Citi analyst Scott Chronert.
With a rate cut in the rearview, all roads lead back to one key question: Are we on the precipice of an AI-fueled golden age, or the edge of a cliff?—LB