On Tuesday, the Fed voted to cut the federal funds rate by 25 bps, the first interest rate reduction since December 2024.
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The decision comes as the S&P 500 (SPX) trades near record highs. Historically, the benchmark index has averaged a one-month return of 0.1% when the Fed cuts within 2% of all-time highs, according to Carson Investment Research.
Long-Term S&P 500 Bulls Benefit from a Rate Cut
The long-term returns in this scenario are even better. The S&P 500 has an average three-month return of 2.3% and six-month return of 3.4%. After 12 months, the index has traded higher on all 20 occasions with an average return of 13.9%.
The long pause in rate cuts may also offer a bullish signal. When the Fed waits between five and 12 months to resume cuts, the S&P 500 has an average six-month and one-year return of 4.4% and 12.9%, respectively. At the same time, it could result in short-term downside as investors digest the economic outlook, with an average one-month loss of 0.9% and three-month loss of 1.3%.
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