• U.S. equities have historically posted positive returns in 8 out of 10 Fed rate-cut cycles since 1982, averaging gains of 10.4% over the following year.
  • The outcome is highly dependent on economic context, with returns ranging from -23.9% to +32.1% based on whether cuts extend a growth cycle or fail to avert a recession.
  • BMO analysts argue the current backdrop of job growth, above-trend GDP, and strong earnings forecasts resembles the more positive historical cases, supporting a continued bull market.

In a note to clients, BMO Capital Markets highlighted a compelling historical trend for equity investors: the initiation of interest rate cuts by the Federal Reserve has typically been a bullish signal, not a bearish one. Their analysis of cycles since 1982 shows the S&P 500 has climbed in the year following the first cut 80% of the time.

The critical differentiator, according to the firm's research, is the underlying health of the economy. In scenarios where rate cuts were implemented as a precautionary measure to extend an economic expansion—a so-called "soft landing"—equities rallied strongly. Conversely, the two negative instances occurred when the Fed was already behind the curve and cuts were unable to stave off an impending recession, leading to significant market declines.

BMO suggests the current macro environment bears a stronger resemblance to the former, more optimistic cases. "With jobs still growing, GDP above trend, and S&P 500 earnings forecast to rise at a double-digit pace through 2026, the backdrop supports the view that equities are likely to remain in a bull market unless a major economic downturn occurs," the note stated.

The firm posits that the intense market debate over the precise number of basis points the Fed will cut this year "misses the point." The more consequential factor is whether the economic expansion remains intact. While BMO remains constructive, they caution that the magnitude of future gains may be more modest following the substantial rally already witnessed. The analysis serves as a reminder that while history favors the bulls post-easing, the wide range of potential outcomes demands vigilance.