Fed Rate Cuts and the S&P 500: Can Monetary Easing Extend the Bull Market?

The Federal Reserve's September 2025 decision to cut interest rates by 0.25 percentage points—marking the first reduction of the year—has reignited debates about the interplay between monetary policy and equity markets. With the S&P 500 trading near record highs and the Fed signaling two more rate cuts by year-end, investors are asking: Can easing monetary policy extend the current bull market?

A Risk-Managed Approach to Rate Cuts

The Fed's move reflects a shift from its earlier hawkish stance, driven by a softening labor market and rising unemployment. Job growth has slowed sharply, pushing the unemployment rate to 4.3% in September 2025, while inflation remains stubbornly above the 2% target at 3.1%Fed Cuts Rates for First Time This Year^[1]. Fed Chair Jerome Powell emphasized a “meeting-by-meeting” approach, prioritizing risk management amid diverging economic signalsFed approves quarter-point interest rate cut and sees two more^[2]. This strategy mirrors historical precedents where rate cuts were used to preemptively address slowdowns rather than react to full-blown recessions.

Historical Precedents: Rate Cuts Near Market Highs

When the Fed cuts rates while equities are near all-time highs, the outcomes are mixed in the short term but often positive over the long term. According to a 40-year analysis, the S&P 500 has averaged 15% returns in the 12 months following rate cuts initiated near market peaksWhen the Fed Cuts Rates Near Market Highs: What History Tells Us^[3]. For example, cuts in 1995 and 1998—implemented during economic expansions—were followed by multi-year bull runs, as investors interpreted the moves as growth-supportive measuresA Fed Rate Cut With The Stock Market At A Record High? Here's What History Says^[4]. Similarly, the 2019 rate cuts, which occurred amid a strong economy, coincided with a 25% rally in the S&P 500 over the next 12 monthsHow The Stock Market Performs After Federal Reserve Rate Cuts^[5].

However, the context matters. During recessionary periods, such as the 2001 and 2007 rate cuts, the S&P 500 declined in the year following the initial reductionsWhen the Fed Cuts: Lessons from Past Cycles for Investors^[6]. The key distinction lies in whether the cuts are normalization-driven (to sustain growth) or recessionary (to mitigate damage). The 2025 cuts fall into the former category, as the U.S. economy is still expanding, albeit at a slower pace (projected 1.6% GDP growth for 2025)Federal Reserve lowers interest rates by 0.25 percentage points in^[7].

The S&P 500's Record Highs and Bull Market Dynamics

The S&P 500 reached an intraday high of 6,508.23 on August 28, 2025, before closing at 6,501.86—the index's highest closing value in historyThe S&P 500 reached its highest closing value ever on August 28, 2025^[8]. By September 15, 2025, it had surged further to 6,615.28, fueled by expectations of Fed easing and strong corporate earningsA Historic Ascent and Its Driving Forces^[9]. This positioning aligns with historical patterns where rate cuts near market highs have historically delivered positive outcomes. For instance, in 12 out of 12 cases since 1980, the S&P 500 was higher a year after such cuts, with an average return of 15%How Stocks Historically Performed During Fed Rate Cut Cycles^[10].

While short-term volatility is likely—markets often fluctuate in the initial months after a rate cut—the long-term trajectory remains favorable. The 2025 cuts, combined with accommodative monetary policy, could lower borrowing costs for corporations and consumers, potentially boosting earnings and economic activity. This dynamic was evident during the 2009–2015 bull market, where Fed intervention helped restore confidence and liquidity despite initial turbulenceThe Historical Implications of Federal Reserve Rate Cuts on Stock, Bond, and Gold Markets^[11].

Risks and Considerations

Investors should remain cautious. Inflation, though easing, is still above target, and the Fed's dual mandate balancing act introduces uncertainty. Additionally, the pass-through effects of Trump-era tariffs on inflation may linger longer than anticipatedFederal Reserve lowers interest rates by 0.25 percentage points in^[12]. Short-term volatility is also a risk, as seen in historical data where the S&P 500 had only a 45% chance of positive returns in the first month after a rate cutWhen the Fed Cuts Rates Near Market Highs: What History Tells Us^[13].

Conclusion: A Tailwind for Equities?

The Fed's 2025 rate cuts, coupled with the S&P 500's record highs, suggest a scenario where monetary easing could extend the current bull market. Historical evidence shows that normalization-driven cuts—particularly those made during economic expansions—tend to support equity gains over the long term. However, investors must navigate near-term volatility and monitor inflation's trajectory. For now, the Fed's risk-managed approach appears calibrated to preserve growth, potentially providing a tailwind for equities as 2026 approaches.