How US equities and US fixed income performed with a resumption of Fed easing

Executive summary

In this paper, we:

• Revisit our 2024 research paper on asset performance in interest-rate-cutting cycles to compare our outlook to how equity and fixed income markets actually performed
• Give an update on the current global rate-cutting cycle, as many central banks have continued cutting rates during the Federal Reserve’s pause
• Review the performance of equities in the eight previous historical periods when the Fed paused in the middle of a rate-cutting cycle and later resumed cutting
• Review the performance of fixed-income assets in the same eight periods of a Fed pause
• Review the macro backdrop of the eight periods to consider GDP growth, earnings growth and equity valuations
• Offer conclusions

Revisiting our 2024 analysis

Almost one year ago, we published “How Equities and Treasuries Performed in Rate-Cutting Cycles.” 

At the time, our analysis showed that during expansionary easing phases—periods when the Federal Reserve (Fed) cut rates while gross domestic product (GDP) growth was positive—equities have historically delivered strong returns. The past year has confirmed that pattern once again: Since the first rate cut of this cycle in August of 2024, the S&P 500 has risen by roughly 16%, broadly in line with historical performance during prior expansionary easing episodes.

With this backdrop, the logical next question to ask is, “What comes next?”. Having paused after cutting interest rates in September, November and December 2024, the Fed is once again approaching a potential policy inflection point to resume cuts, and investors are increasingly focused on the timing and consequences of additional policy easing in the second half of 2025. Recent market pricing reflects that anticipation—fed funds futures currently imply more than two full cuts of 25 basis points (bps) by year-end and that they will most likely happen in September and December.¹

In this paper, we examine how financial markets and the broader macroeconomic backdrop evolve when the Fed resumes cutting rates after a pause. Following an update |on global central bank easing over the past year, we turn to past rate cuts after a pause, structuring our analysis in three parts:

1.  Equity performance following an interest-rate cut after a pause
2.  Fixed income performance following a rate cut after a pause
3.  Macro backdrop: GDP, earnings, valuations

Conclusions

1.  Equities appear likely to grind higher amid rising volatility. Not all cuts are the same. Early cuts in a cycle historically have been bullish and come with relatively low volatility. Interest-rate cuts after a pause, by contrast, have been typically associated with higher short-term volatility, but they have nonetheless averaged strong one-year returns across equity styles. On average, the Russell 2000 Index small caps gained about 20% and the Nasdaq Composite technology stocks gained about 25% one year after such cuts
    
2.  Fixed income also benefits. Fixed income has historically participated in these rallies as well, with US Treasuries returning around 6% and corporate bonds around 8% in the year following a pause-cut
    
3.  GDP growth has typically continued, and although corporate earnings have made only minor progress, price multiples have expanded significantly. Post-pause cuts have often coincided with P/E multiples expanding by over 20% within the first year, underscoring the powerful role of monetary easing in driving equity prices higher despite economic challenges.