According to Bank of America, investors need not worry that the market has overreacted to the recent interest rate cuts. This week, the S&P 500 reached all-time highs following the Federal Reserve’s announcement of its first interest rate reduction in four years. Typically, interest rate cuts are favorable for investors as they decrease borrowing costs, potentially boosting corporate profits. Some have speculated, however, that gains may be limited post-announcement due to the pre-cut rally in stocks.
Bank of America strategist Savita Subramanian has addressed these concerns, presenting data from the 1970s to show that there has historically been no significant impact on equity performance following the initial rate cut, regardless of pre-cut market behavior. Subramanian stated in a client note released on Friday, two days after the 50 basis points reduction by the central bank, that fears of equities prematurely advancing in response to the Fed’s actions are “ill founded.”
Subramanian’s analysis found no correlation between the returns observed before the Fed’s first rate cut and the market’s performance over the following 12 months. Additionally, she emphasized that the S&P 500 being near a 52-week high prior to the cut has had an even lesser impact. She pointed to 1995 as an example, a year when the S&P 500 surged nearly 23% in the months following the initial rate cut, despite a preceding 26% rally that brought the index within 1% of record highs.
Historically, there is a basis for optimism. On average, the S&P 500 has risen 11% in the year following an initial rate cut. In scenarios where a recession did not occur, the average rally increased to over 20%.
