The performance of U.S. stocks over the past year has indeed been closely tied to the Federal Reserve’s rate-cutting policy. In the second half of last year, the Federal Reserve cut rates three times in a row, pushing the benchmark rate down into the 3.50%-3.75% range. How much impact did this round of cuts have on the stock market? To be honest, it’s more complex than many people think.

First, let’s talk about the most straightforward phenomenon. As bank time-deposit interest rates kept sliding down, conservative funds that previously relied on earning interest from banks started to feel restless. This money doesn’t simply disappear—it looks for higher returns. The stock market naturally becomes a top destination, especially for stocks with stable dividends and dividend yields higher than bank interest rates, which suddenly become particularly attractive.

But this is only the surface. The real power of rate cuts for the stock market is the reshaping of valuations. Imagine that when interest rates fall, future cash flows become more valuable in today’s terms. For growth tech companies, although profits may be limited right now, the market is willing to pay a higher premium for their future growth stories. For large tech stocks like NVDA and MSFT, their valuations depend largely on discount rates. When interest rates drop, discount rates fall too, and the present value of these companies’ future cash flows rises accordingly.

There are also plenty of benefits at the corporate level. For companies carrying high debt, lower rates directly reduce interest expenses. The money saved flows straight into EPS, bringing tangible improvement to the income statement. At the same time, falling borrowing costs also stimulate consumption. Mortgage rates and auto loan rates both trend downward, releasing American consumers’ purchasing power—an actual positive for sectors like retail and automobiles.

When it comes to which parts of the market benefit from rate cuts, some sectors are clearly more favorable than others. Tech stocks are the most obvious: from large-cap heavyweight names to mid-sized SaaS companies, all benefit from lower financing costs. Small and medium-sized enterprises are more sensitive to interest rates; in the Russell 2000 index, many companies hold floating-rate debt, so after rate cuts, their interest expense drops immediately.

Biotechnology companies are also winners. Those biotech firms that aren’t profitable yet but are burning cash to do R&D benefit from a significant drop in financing costs, which is a major tailwind for both their survival and expansion.

Then there are defensive sectors. When U.S. Treasury yields fall, fixed-income investors begin rotating into “bond-like” stocks, making utility stocks especially attractive. Real estate investment trusts also benefit—particularly REITs tied to data centers and logistics/warehousing. Lower financing costs together with a rebound in property valuations create a double benefit.

Don’t forget precious metals and resource stocks. Rate cuts are often accompanied by a weaker U.S. dollar, which is especially beneficial for gold priced in U.S. dollars. Gold-mining stocks often rise by several times the increase in the gold price, though the risks also become proportionally higher.

But here’s an important reminder. For rate cuts to have the intended impact on the stock market, the economy must be reasonably stable and inflation must have already fallen back to a controllable range. If rate cuts are triggered because the economy is about to run into problems—say, unemployment surges—then the situation is exactly the opposite. In that case, the market doesn’t see it as good news; it sees it as a recession signal. Stock markets often plunge first, because investors worry that corporate profits will deteriorate faster than the benefits created by the rate cuts.

So, the impact of rate cuts on the stock market is a double-edged sword. The same rate-cut policy can produce vastly different results under different economic conditions.

Finally, even if you’re in a “star” sector, whether you can truly profit still depends on the competitiveness and financial health of the individual stock. If a company’s competitiveness is deteriorating or its debt structure is extremely poor, no matter how good the broader environment is, it can’t save it. Rate cuts are just a tailwind from the macro side; whether it can reach the profit endpoint depends on the company’s own fundamentals and whether the market has already priced in expectations for the rate cuts. Therefore, when selecting stocks, don’t focus only on sector rotation—the quality of the individual company is just as important.