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The big news of the week was the Federal Reserve cutting interest rates for the first time in 2025. But it didn’t move the needle much for stocks — in fact, the Nasdaq Composite sank, and the S&P 500 was flat.

That’s because the 25 basis-point cut was likely already baked in, as just about everyone knew it was coming for weeks, fueling a 3% rise in the S&P 500 this month.

But where do we go from here? Vanguard experts Kevin Khang, senior international economist, and Brian Kim, co-head of high yield research, offered their take in recent commentary.

In their view, given inflation and labor market trends and expectations, rates are still going to remain somewhat elevated for an extended period.

We suggest that investors focus not on the short-term theatrics of potential rate cuts, but on the longer-term forces shaping returns,” Khang and Kim wrote. “In this environment, where medium- and long-term rates remain high, markets are likely to reward companies that can deliver consistent, high-quality earnings growth. Think the tech-sector growth companies in the U.S., if they can maintain their momentum.”

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The Vanguard experts noted that in an environment where rates stay elevated over the medium and long-term, fixed income should remain appealing.

“With yields at historically attractive levels, especially relative to historically low equity dividend yields, demand for bonds is likely to remain strong. This could further reshape portfolio allocation approaches for the years ahead,” they wrote.

They also cited three sectors within the equity universe that could potentially benefit the most from rate cuts – as they have been most sensitive to the higher rate environment since 2022.

• Housing. Sharp interest rate hikes in 2022 and 2023 have “stalled the market at unaffordable levels.” Mortgage rates have surged, demand has weakened, and supply is constrained leading to a dormant market. “A rate cut might offer some hope, but it won’t solve the deeper affordability and supply issues.”
• Private equity. “Private equity thrived in a world of cheap debt and ever-expanding multiples. But the golden era of easy exits—where sponsors could count on rising public market valuations to offload portfolio companies—is over,” they wrote. Lower borrowing costs could help, but a strategic rethink may be needed.
• Small caps. “Small cap companies relied heavily on short-term debt to sustain operations. In a low-rate world, that approach was manageable,” they wrote. However, it has caused many of these companies to become weaker with each debt rollover bringing higher interest costs. “These firms are not just hoping for rate cuts but depending on them.”

While reduced rates could provide a short-term rally, the longer-term picture is less clear.

“What lies beyond the noise of rate cuts? More importantly, how will the investment landscape evolve as we get through a prospective cutting cycle that has just begun?” they wrote.

The “real story” they say, is how investors “adapt to a world where structurally higher rates—and the forces behind them—are likely here to stay.“

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