The Fed will almost certainly begin slashing interest rates again next week. According to the CME Group’s FedWatch Tool, there is now a 100% chance Jerome Powell and company will cut rates by some amount on September 17; 89% think it will be by 25 basis points, another 11% think it will be by 50 basis points, much like last September.
By year’s end, there is a better than three out of four chance (77.4%) that the Fed will reduce the federal funds rate by 75 basis points, to a range of 3.5% to 3.75%. A small but growing minority – 9.6% – think the Fed will cut by 100 basis points, which would mirror last year’s September-through-December cuts. The recent slump in the jobs market has essentially forced the FOMC’s hand, or so the thinking goes. A bad jobs report last July prompted swift action by the Fed in the ensuing months, and it appears history will repeat itself this fall.
[text_ad]
What Happened the Last Time the Fed Slashed Rates
On this date (September 12) a year ago, the S&P 500 was trading just below the all-time high, having quickly recovered from a mini-selloff the first week of September. From that point through the end of the year, when the Fed cut the federal funds rate three times by a total of one full percentage point (or 100 basis points), the benchmark index advanced exactly 7% (see chart below).
Stocks have fared just fine since, with the S&P up more than 11% in 2025. But that’s not the same as a 7% gain in roughly three and a half months. Rate cuts are a performance enhancer for stocks. That was true in 2020, when the rates were reduced to zero in the blink of an eye (by 150 basis points that March) to combat a Covid-induced slowing of the U.S. economy. And it was true the year before, in 2019, when the Fed slashed rates by 75 basis points from August 1 through October 31, sending stocks to then-record highs.
So even at all-time highs now, the (presumed) resumption of rate cuts next week should push stocks to even greater heights in the months to come – or at least that’s what history tells us. And stocks are likely to keep advancing as long as the Fed is cutting. Whether that’s only through year’s end again, before another extended pause, remains to be seen. But it’s best to capitalize while they’re doing it by continuing to buy stocks, despite their heated valuations and forceful recent run-up.
Value Opportunities Abound
Now, not all stocks are created equal. The S&P 500 currently trades at more than 23x forward earnings estimates – the index’s highest valuation since February. However, seven of the 11 major S&P sectors trade at price-to-earnings ratios that are lower than the index’s, five of which trade at forward P/Es of less than 20. I prefer to focus on those sectors, at a time when technology-related plays, thanks mostly to AI, look a bit frothy. There’s plenty of value out there despite the record-high market, and because corporate earnings have been growing at such a healthy clip – with double-digit percentage growth in each of the last two quarters – you can find plenty of growing companies trading at value prices right now.
Growth at value prices has long been the type of stock I strive to unearth in my Cabot Value Investor newsletter. In fact, there are 10 such stocks in the Value Investor portfolio right now. To learn their names, click here. With or without my help, however, you should be buying stocks hand over fist. Recent rate-cutting cycles suggest you’ll be rewarded, at least in the intermediate term.
[author_ad]
