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 cutThree months after first rate cutSix months after first rate cutOne 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%-7.2%
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, and 2001. 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.
Learn More on the Voronoi App
To learn more about this topic from a sector perspective, check out this graphic on how sectors perform after the first interest rate cut.
The post Visualizing S&P 500 Returns After Interest Rate Cuts appeared first on Visual Capitalist.