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The Federal Open Market Committee (FOMC) kept rates the same following its July meeting, to the surprise of almost no one. But investors are far more hopeful that the first rate cut of 2025 will come in September when the FOMC next meets on September 16-17.

According to the key gauge of investor sentiment, the CME FedWatch survey, an overwhelming 86.5% of interest rate traders anticipate a 25-basis point reduction in the federal funds rate in September.

While that is not a guarantee, only speculation, and while economic factors could influence the Fed between now and then, it is certainly the most optimistic that investors have been in a year. If the FOMC does reduce rates in September, it would be the first cut since December of 2024 in this current easing cycle – which essentially means rate cutting cycle.

If that is indeed the case, how would this affect stock market returns? That question was recently tackled by Jeff Buchbinder, chief equity strategist at LPL Financial.

An average return of 30% in past easing cycles

In commentary last week, Buchbinder examined how stocks perform during past rate cutting cycles, lending some historical perspective that may be relevant now as we move through one.

Buchbinder looked at the past 9 rate easing periods, dating back to the 1970s, with a cycle defined as the initial period of rate cuts through the next interest rate hike.

The LPL strategist found that the S&P 500 has risen in all but three of the past 9 easing cycles, with an average return of 30.3% over the course of the cycles.

The current cycle, which began last September, has already yielded a 12% return. The one before that, which lasted 593 days from August 1, 2019, to March 16, 2021, produced a 38.2% return.

The best cycle occurred from July 7, 1995 to June 29, 1999, when the S&P 500 rose 161.1%. That followed a 62.8% return from the cycle that ran from June 6, 1984 through September 4, 1993.

The worst cycle followed the easing period from September 19, 2007 through December 16, 2009, during the Great Recession, when the S&P 500 fell 23.5%. It also dropped 9.6% in the post-dotcom bubble rate-cutting spree from January 4, 2021 through June 24, 2004.

What can we expect from this cycle?

While we are already more than 320 days into the current cycle, there is quite a way to go. The average easing cycle has run 721 days, according to LPL, and while things can change, this has the potential to be a massive one.

The Fed’s latest summary of projections has the federal funds rate at 3.4% at the end of 2027, which would suggest 2 years and 5 more months of easing — another 900 or so days. And it could go longer than that, as the longer run projection calls for a rate of 3%.

This is all subject to change, and tariffs add a significant degree of uncertainty. However, it is possible that this cycle could be one of the longest ever.

What should investors expect? Buchbinder sees some opportunities ahead, with one big caveat.

“Using history and prior Fed cutting cycles as a guide, some upside potential may remain for the second half of 2025,” Buchbinder stated. “Further, the latest big tech earnings reports continued to deliver robust artificial intelligence (AI) spending plans. In addition to signaling the secular AI growth theme remains intact, these spending plans are a big potential driver of earnings growth and future productivity gains. But of course, past performance does not guarantee future results, and a new tariff regime not seen since the 1930s could slow earnings growth and fuel volatility.”

Buchbinder added that the economy could be impacted in the second half of 2025 by the delayed effects of trade policy.

“With only a handful of major trade deals left to be inked (namely China and Mexico), a floor for the effective tariff rate at 15% is likely set,” Buchbinder said. “The effects will be temporary, but some upward pressure on inflation and a drag on profit margins have yet to be felt and will be this market’s biggest test over the seasonally weak period for the stock market over August and September.”

Preferred sector and styles

Ultimately, investors should be prepared for bouts of occasional volatility, said Buchbinder. This is due to several factors, including the rising valuation of stock prices, with the S&P 500 P/E ratio near 30.

At present, LPL’s Strategic and Tactical Asset Allocation Committee (STAAC) advises against increasing portfolio risk beyond benchmark targets, with valuations still high.

Further, the committee favors growth over value, large caps over small caps, and the communication services and financials sectors.

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