Is the Fed's Rate Cut Really Good News for the Stock Market?

Ahem. Master, today's topic is this: 'Is the Fed's Rate Cut Really Good News for the Stock Market?'

The market has been waiting for a rate cut for a long time. But another face may be hiding behind it. Now, let's begin.

Mew

Master, I will first brief you on the current market situation and the historical context of rate cuts.

As we enter the second half of 2025, the market is treating a rate cut by the U.S. Federal Reserve (Fed) as an almost certain event. While inflation has clearly slowed in recent months, signs of an economic slowdown have also become apparent, such as weakening job growth and contracting manufacturing indices. In this environment, the expectation that 'the Fed will soon lower rates to stimulate the economy' is widespread in the market.

However, there is important historical data here. The point is that 'rate cuts' and 'stock price increases' have not always meant the same thing.

• 'Soft Landing' Scenario (Insurance Cut): 1995 is a prime example. At that time, there was no recession, but when there were signs of slowing growth, the Fed preemptively cut interest rates. The market interpreted this as 'the Fed's will to protect the economy,' and the S&P 500 continued a tremendous bull run afterward.


• 'Hard Landing' Scenario (Recession Response Cut): On the other hand, 2001 and 2007 were the complete opposite. The Fed began cutting rates belatedly to respond to a recession that had already started. However, it couldn't reverse the already damaged economy, and the stock market continued a terrible decline for over a year after the first rate cut.

Ultimately, the key question is this: Is the upcoming rate cut an 'insurance cut' like in 1995, or a 'recession-response cut' like in 2007?

Kurumi

Yay! It's finally here! The Fed is going to unleash the money, so what's there to worry about? This is the sound of the party starting! Devilish!

Master! There's a long-standing adage in the stock market: "Don't Fight the Fed!" The most powerful central bank in the world is going to be on our side, so running away now is something only a fool would do!

Why is it good when they cut rates? It's so obvious!

First, the value of stocks magically goes up! That's because the 'discount rate' used to convert a company's future profits into present value gets lower. It might sound complicated, but it just means 'money earned in the future looks more valuable now.' For tech and growth stocks that feed on distant future growth, this is the best gift of all!

Second, it becomes easier for companies to borrow money! With cheaper interest, companies can more easily borrow to build factories, invest in new technology, and even buy back their own shares to boost the stock price! The market will be overflowing with money!

The history Myu-tan mentioned? That's just an old story! We're in the age of the AI revolution now! Because powerful technological innovation is supporting the economy, this rate cut will be the 'fuel' that makes the economy burn even brighter, just like in 1995!

💖 Kurumi's Heart-o-Meter Investment Score: 99/100

This is a buy signal that requires no hesitation! Just trust in our big brother, the Fed, and go for it!

Mikael

Kurumi, your optimism seems as precarious as the last person in a game of hot potato. Before you celebrate the start of a party, shouldn't you consider the possibility that it might be someone's funeral?

My question is simple: "Why exactly is the Fed trying to cut rates?"

Because they are philanthropists? No. It's because there is a strong signal that a serious problem has arisen somewhere in the economy. They don't cut rates in a perfectly healthy economy. A rate cut is a remedy, not a vitamin.

• Symptom and Cause: Many people are cheering at the prescription of a 'rate cut,' but I see the 'disease' that led to that prescription: slowing growth, rising unemployment, and collapsing consumer sentiment. A rate cut is tantamount to the Fed admitting that this disease is more serious than thought.


• History Repeats Itself: Kurumi ignores history, but I learn from it. The stock market has more often peaked around the 'first rate cut' and then entered a long bear market. The most dangerous time is when investors feel relieved, thinking 'it's okay now.' In 2007, everyone cheered the first rate cut, but the subprime mortgage crisis was waiting right behind it.


• The Problem of Time Lag: It usually takes six months to over a year for the effects of a rate cut to appear in the real economy. During that time, corporate earnings can continue to deteriorate. Stock prices rise on expectations, but they must ultimately be grounded in the reality of earnings. A stock price that has risen on expectations alone can collapse in the face of the reality of worsening performance.

🚨 Mikael's Risk Score: 90/100

Chasing the market by buying on the news of a rate cut is like shouting 'I'm not at the bottom yet!' while falling off a cliff. The real crisis may not have even begun.