Markets

Visualizing S&P 500 Returns After Interest Rate Cuts

Published

6 months ago

September 18, 2024

Dorothy Neufeld

Graphics/Design:

Sabrina Lam

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S&P 500 Returns After Interest Rate Cuts

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Today, weaker-than-expected economic data and easing inflation has strengthened the case for U.S. interest rate cuts for the first time since 2020.

Although S&P 500 firms were largely protected from rising rates due to locking in lower rates in 2020 and 2021, many loans are up for renewal in 2025. While S&P 500 returns have typically been positive after rate-cutting cycles, these dynamics may present a unique scenario for corporate America. Sectors that benefited from securing low rates, such as manufacturing, may be most exposed to refinancing risks.

This graphic shows S&P 500 performance after interest rate cuts since 1973, based on data from PinPoint Macro Analytics.

How Does the Stock Market React to Interest Rate Cuts?

Below, we show how the S&P 500 has performed after the first rate cut over the last five decades:

Year of first rate cut	Three months after first rate cut	Six months after first rate cut	One year after first rate cut
1973	-10.2%	-6.2%	-36.0%
1974	-14.7%	-15.3%	+7.5%
1980	+15.0%	+28.9%	+30.3%
1981	-11.0%	-7.9%	-17.8%
1982	-4.8%	+17.4%	+36.5%
1984	-1.2%	+7.2%	+10.5%
1987	+0.1%	+1.7%	+7.5%
1989	+7.4%	+7.5%	+11.9%
1995	+5.1%	+8.0%	+13.4%
1998	+17.2%	+26.5%	+27.3%
2001	-16.3%	-12.4%	-14.9%
2007	-4.4%	-11.8%	-27.2%
2019	+3.8%	+13.3%	+14.5%
Average	-1.1%	+4.4%	+4.9%

Historically, the S&P 500 returns 4.9% on average one year after the first interest rate cut, seeing positive returns nearly 70% of the time.

In the three months following a rate cut, the market often dips, but typically rebounds by the six-month mark. This aligns with conventional wisdom that lower interest rates stimulate economic activity by reducing borrowing costs for businesses and consumers, which tends to benefit the stock market.

However, S&P 500 performance following rate cut cycles can vary significantly. For instance, U.S. equities saw double-digit declines after the first rate cuts in 1973, 1981, 2001, and 2007. On the other hand, the S&P 500 surged 36.5% one year after the 1982 rate cut cycle. In the most recent rate cut cycle, the S&P 500 jumped by 14.5% in the following year.

In this way, interest rate cuts don’t show the whole picture. Instead, positive earnings growth may offer a more reliable indicator of S&P 500 performance in the following year. When earnings growth is positive, the market averages 14% returns one year after. In contrast, when earnings decline during periods of falling interest rates, the S&P 500 increased by 7%, on average.