The Fed Cut Rates: What Now for the S&P 500 and Equity Markets?

The FOMC finally pulled the trigger on interest rates, but media reactions suggest the cuts weren’t as deep as some had hoped. Headlines obsessing over next year’s measly 25 basis points of projected cuts completely miss what’s actually happening. The real story? The Fed plans to slash rates by another 50 bps this year - that’s aggressive action, not hesitation.

I’m looking at a total of 100 bps in cuts between now and mid-2026. While the immediate effects won’t be dramatic, this significant rate reduction over a relatively short timeframe will gradually create momentum throughout the economic system. For equity markets, this spells opportunity.

The S&P 500, which ultimately follows earnings rather than headlines, was already projected for growth over the next six quarters. Now that outlook appears even brighter. I expect upcoming earnings reports to exceed expectations, triggering analyst upgrades across individual stocks and entire sectors.

Technically, the index looks strong. Having consolidated between 7,400 and 7,600 at earlier highs this year, those targets were validated after the rate announcement. The market’s initial reaction was subdued, but the following session saw a new high, accelerating the rally.

Tech stocks will continue dominating. Businesses will feel the first benefits of these cuts, with tech companies perfectly positioned to capture increased capital flows. AI infrastructure giants are already reaping rewards, but smaller application-focused AI players like Palantir and C3.ai are gaining momentum too.

These companies deliver tangible business benefits - simplifying complex tasks, cutting costs, boosting revenue, and strengthening margins. Their growth trajectory over the next decade looks impressive.

Small caps deserve attention too. Lower interest rates will benefit all smaller companies, not just tech, continuing the rotation that began earlier this year. The Russell 2000 jumped over 2% the day after the Fed announcement, hitting record highs. If this signal holds true, the small-cap index could surge 30-40% by mid-next year.

Consumer spending forecasts for the 2025 holiday season look dismal, with predictions of mid-single-digit declines. But I think they’re overly pessimistic. The rate cut will boost consumer sentiment at minimum, potentially delivering better-than-expected results. Consumer staples stocks might grow modestly in the second half, outperforming consensus before accelerating next year.

The housing market is the wild card. After years of being essentially frozen, falling rates could finally thaw this crucial sector. At 5.5% (down from September’s 6.25%), 30-year mortgage rates might be low enough to ignite a housing boom and usher in a golden age for builders.