A slowing job market has raised the hope for interest rate cuts from the Federal Reserve. While the Fed doesn’t have a strong track record of cutting rates early enough to prevent recessions, history shows that stocks have often fared well after rate cuts. Still, investors should remember that the Fed tends to make these moves during uncertain times, which means the road ahead could be bumpier than headlines suggest.

Why Cut Rates

All eyes are on the Federal Reserve (Fed), which is looking to restart interest rate cuts after having been on hold all year due to concerns about tariffs' impact on inflation. Per the 1977 Federal Reserve Act, the Fed has a dual mandate to keep the economy growing in a way that promotes jobs for everyone and maintains inflation at 2%.

Today, the Fed is navigating a period of positive but slowing economic growth, while also battling a stalled job market and higher-than-desired inflation. As of September 10, the markets are pricing in three 0.25% interest rate cuts in 2025 as they expect the Fed to focus on the job market over inflation concerns.

Should Investors Be Worried?

Given that the Fed typically cuts interest rates to stimulate economic activity and avoid a recession, should investors be worried?

History shows us that the Fed has not had a good track record of cutting rates early enough to avoid a recession. However, this has not necessarily spelled doom for stock markets.

For stocks, lower interest rates are generally positive as they allow businesses to access cheaper financing for growing their business. Since 1970, looking at cumulative stock returns after the Fed started to cut interest rates, most of the time, stocks have been up one year later. The one-year periods that had double-digit declines coincided with the inflation spiral of the 70's and 80's, the bursting of the dot-com bubble in 2000, and the great financial crisis of 2008.

As we span out three years after the first rate cuts, the number of instances of negative returns declines, and it has never been down for five years after the initial rate cut. No surprise, stocks fared better when a recession was avoided, but the gap in performance is smaller than one would anticipate, even during a recession.

Source: FactSheet, FRED

Summary

The Fed has a challenging road ahead as it will need to recalibrate its policy to balance economic growth without reigniting inflation. If the Fed can improve its batting average, this time remains to be seen. On the one hand, higher inflation and a weaker job market are weighing on lower-income consumers, a sign of potential economic cracks. On the other hand, the world's largest and most profitable companies are investing record amounts in artificial intelligence technology for future productivity gains, which does not align with an imminent recession.

Even for the skeptics who doubt whether the Fed can engineer a soft landing (i.e., avoiding a recession while keeping inflation in check), history shows that stocks have fared reasonably well post-rate cuts in both scenarios.

While the past is no guarantee of the future, lower interest rates generally have been positive for stocks. Of course, the market never moves up in a straight line, and investors should always be prepared for periods of volatility as the Fed often cuts interest rates at precarious times in the economy.

Stay Focused on Long-Term Goals

As the Fed works to balance slowing job growth, stubborn inflation, and the need to sustain economic momentum, investors may see more volatility in the months ahead. But history reminds us that, even when rate cuts happen at precarious times, markets have generally delivered positive results in the years that follow. Staying focused on long-term goals, rather than short-term noise, remains the best way to navigate what lies ahead.

If you’d like to discuss how potential rate cuts could impact your portfolio, contact us today.

James Artale is a financial advisor located at EmVision Capital Advisors, 251 W. Garfield Rd. ​Suite 155 Aurora, OH 44202. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at (330) 954-3770 or at info@emvisioncapital.com.

Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Additional advisory services offered through EmVision Capital Advisors, LLC are separate and unrelated to Commonwealth. Fixed insurance products and services are separate from and not offered through Commonwealth Financial Network. Registration as an Investment Adviser does not imply any level of skill or training.

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8387675.1 | 09/2025 | EXP 09/30/2027