How equities and Treasuries performed in rate-cutting cycles

Historical analysis shows that equity market performance following the Federal Reserve's rate cuts varies based on economic conditions. Generally, when rate cuts occur during periods of economic expansion, the equity market tends to rally with low drawdown risk in the year after the initial cut.

Particularly since 1990, growth and small-cap stocks have outperformed. The current consensus in financial markets anticipates the Fed's first rate cut in September, potentially followed by another in December, although earlier expectations of up to seven cuts this year were tempered by persistent inflation.

With the S&P 500 Index near record highs, investor sentiment could shift either towards increased bullishness, viewing the cuts as a means to sustain economic growth, or bearishness, interpreting them as signals of economic deceleration. This paper seeks to address these potential market reactions by drawing on historical trends.