How US equities and US fixed income performed with a resumption of Fed easing
With more Fed rate cuts seen as a strong possibility heading into year-end, Franklin Templeton Institute explores how stock and bond markets have historically performed during the resumption of Fed easing and what investors need to know.
In a new paper, Chris Galipeau, Senior Market Strategist and Lukasz Kalwak, Market Strategist at the Franklin Templeton Institute have examined how financial markets and the broader macroeconomic backdrop evolve when the Fed resumes cutting rates after a pause.
They noted, “Historically equities appear likely to grind higher amid rising volatility. Not all cuts are the same. Early cuts in a cycle historically have been bullish and come with relatively low volatility. Interest-rate cuts after a pause, by contrast, have been typically associated with higher short-term volatility, but they have nonetheless averaged strong one-year returns across equity styles. On average, the Russell 2000 Index small caps gained about 20% and the Nasdaq Composite technology stocks gained about 25% one year after such cuts
“Fixed income also benefits. Fixed income has historically participated in these rallies as well, with US Treasuries returning around 6% and corporate bonds around 8% in the year following a pause-cut
“GDP growth has typically continued, and although corporate earnings have made only minor progress, price multiples have expanded significantly. Post-pause cuts have often coincided with P/E multiples expanding by over 20% within the first year, underscoring the powerful role of monetary easing in driving equity prices higher despite economic challenges.”
“Probably the most surprising finding of our study is that interest-rate cuts following a pause have not historically provided a strong boost to corporate earnings. In the current environment, one could argue that the Fed is already late in making its next cut, with a softer labor market and the drag from tariffs already likely to weigh on corporate earnings. That said, it is worth remembering that US corporate earnings have risen for seven consecutive quarters at a pace of at least 8.5%,4 suggesting that the resilience of US firms may be underappreciated in this framework.
“Still, the historical record speaks for itself: Much like equities, earnings outcomes have been highly variable, ranging from robust +37% earnings-per-share (EPS) growth in 2003 to a sharp -24% contraction in 2008.”
