Resumed Fed cuts, persistent tensions, and market implications

• Tension remains around the Fed’s dual mandate. The “muddle-through” economy looks set to persist, and on the margin, today’s rate cut should offer support.
• Fed rate cuts near market highs have historically led to further gains, though not in a linear fashion.
• Still, Fed policy is just one of many inputs in our investment framework.
• Corporate profits continue to be the north star for the market and will be critical to monitor.
• For now, the bull market continues to earn the benefit of the doubt.

• As widely expected, the Federal Reserve (Fed) cut the federal funds rate by 25 basis points (0.25%) to a range of 4.00%–4.25%, marking the first rate cut since December and ending the longest pause since 2002.
• Notably, there was only one dissent – from new Fed Governor Stephen Miran, who favored a more aggressive 50-basis-point (0.50%) cut.
• The Fed’s updated dot plot projects two additional cuts by year-end, totaling 50 basis points.
• The Fed acknowledged a moderation in economic activity and flagged that “downside risks to employment have risen,” even as inflation “remains somewhat elevated” – a clear signal of the tension in the ongoing policy balancing act.
• Similarly, for next year, the median projection in the Summary of Economic Projections (SEP) is expecting slightly better GDP growth but also somewhat higher inflation, likely due in part to slower pass-through of tariffs.
• The median projection for the federal funds rate at the end of 2026 was also revised slightly lower, to 3.4% vs. the previous estimate of 3.6%.
• Markets swung back and forth as the market digested the resumption of rate cuts vs. the tension that remains with the Fed’s dual mandate.

Economic outlook

The Fed’s rate cut was largely in line with our expectations, though it came with less internal division than some investors had anticipated. The Fed is placing greater emphasis on the softening employment picture and sustaining the business cycle. That said, there remains a notable split among committee members in their projections through 2026.

Our Head of U.S. Economics continues to expect a modest pickup in growth into 2026—from 1.6% to 2.0%—supported by:

• The passage of the One Big Beautiful Bill.
• Lower short- and immediate-interest rates; the 10-year U.S. Treasury yield is already down 75 basis points from its January peak.
• Low oil prices helping buffer headwinds, such as tariffs, as should deregulation and continued artificial intelligence and technology spending.

Market perspective

We don’t view today’s decision as a game changer, but rather an incremental positive.

• Historically, equities have responded favorably to falling policy rates over the following year, particularly when a recession is avoided, which remains our base case.
• Rate cuts near all-time highs have also tended to be constructive.

Since the current easing cycle began last September, the S&P 500 has risen over 15%. Then, as now, stocks were trading near record highs amid concerns around employment and inflation. Importantly, the market’s path was not linear, with notable pullbacks along the way.

Our analysis of prior easing cycles since the 1980s shows that when the Fed cuts rates while the S&P 500 is within 3% of its all-time high:

• The S&P 500 has been higher over 70% of the time across 3-, 6-, and 9-month horizons
• On a 12-month basis, it has shown gains over 90% of the time (25 of 27 occasions)

Importantly, Fed policy is just one of many factors in our investment framework—but understanding historical trends remains a pragmatic starting point.

While Fed cuts do matter, our view is the resilience of corporate profits will remain the key north star for the market.

Bottom line

Tension remains around the Fed’s dual mandate. The “muddle-through” economy looks set to persist, and on the margin, today’s rate cut should offer modest support, especially as clarity improves around the tax bill and prospects for additional deregulation.

From an equity perspective, rate cuts when stocks are near record highs have historically been constructive. Still, Fed policy is just one of many inputs in our investment framework.

Corporate profits will be critical to monitor as we assess whether stocks can build on recent gains over the next year - our base case. For now, the bull market continues to earn the benefit of the doubt.