The Fed Just Lit the Stock Market Fuse

The Fed Just Lit the Stock Market Fuse

• The Fed lowered rates with the market at new highs.

• The S&P 500 Index tends to rally 36% over the following 2 years.

• The Nasdaq Composite averages a 27% return over the same time frame.

In investing, the loudest voice isn’t always the smartest bet...

After more than two decades on Wall Street, I’ve heard my fair share of market sayings. Most are punchy one-liners that always get a smile. But one has always stuck with me… Pessimists sound smart, but optimists make money!

That line cuts through the noise. Pessimists love a good story. They cite risks, spotlight flaws, and sound like they’ve seen it all. They win the soundbite game. But markets tend to reward those who lean into progress—not just point out problems. Optimists back innovation, bet on resilience, follow the data, and stay invested when it’s uncomfortable. That’s where the real returns come from.

Lately, that phrase has taken on new meaning.

The S&P 500 has hit several new highs this year, and the bears have gotten loud. Every day, it seems like there’s a new data point or headline being pitched as the next crash trigger…

Take third-quarter earnings. Before reports started rolling in, outlets like CNBC, Bloomberg, and The Financial Times warned that companies couldn’t possibly meet expectations. Then S&P 500 companies posted 13.1% earnings growth, blowing past the 7.9% estimate. But suddenly, guidance wasn’t good enough. Or look at SoftBank’s sale of its Nvidia stake. Some spun it as a bearish signal for AI. But the profits are being reinvested into building out AI infrastructure. That’s not a retreat, that’s reallocation.

All this noise is designed to grab your attention. But it can also make you miss the real signals.

And a couple of weeks ago, we got a big one—from the Federal Reserve. Our central bank cut interest rates while both the S&P 500 and Nasdaq were within 1% of their all-time highs. Historically, that’s been a strong setup for stocks.

But don’t take my word for it, let’s look at what the data’s telling us…

If you’ve followed my work, you know I pay close attention to Fed policy. Why? Because it shapes the liquidity backdrop for both institutional and retail investors. When borrowing costs fall and money gets easier to access, investors have more fuel to buy assets. When rates rise, that asset propellant dries up.

In my view, rates still have room to fall. Based on my estimate of the real fed funds rate (effective fed funds rate minus inflation), the Fed could cut another 150 basis points before hitting neutral, where policy neither stimulates nor restrains the economy. In addition, the current makeup of the FOMC, through 2027, leans dovish. That means more cuts are likely.

Given that backdrop, I wanted to see what it could mean for stocks. After all, it’s one thing to say stocks rally when the Fed cuts rates but it’s another to prove it.

To find out, I looked at every instance since 1980 when the Fed cut rates while the S&P 500 or Nasdaq was within 1% of a record high. I used the closing price on the day of the rate cut as the starting point and calculated total returns (with dividends reinvested).

Here’s what I found for the S&P 500…

As you can see in the table above, this scenario has played out quite a few times. Based on the results, the S&P 500 has averaged a 17.6% increase 12 months later and a 35.9% gain after 24 months. That compares to the annual average of 9.5% since 1928. In addition, those two intervals have had a perfect track record.  

Now for the Nasdaq Composite…

Based on the results, the Nasdaq has averaged a 17.2% increase 12 months later and a 27.1% gain after 24 months. That compares to the annual average of 11% since 1971. And, a success rate of 83% and 91% for the one- and two-year time frames isn’t too shabby.

So, when the noise gets loud and the headlines get heavy, remember what the data’s telling us. The Fed’s actions aren’t just policy, they’re signals. And when those signals align with market strength, history has a way of rewarding those who remain patient and stay the course.

That’s not just optimism. That’s history talking.

Five Stories Moving the Market:

Network-equipment giant Cisco Systems boosted its 2026 forecast, showing progress in its effort to capture more artificial intelligence spending; the company now expects sales of as much as $61 billion in the fiscal year ending July, about $1 billion more than its previous forecast and higher than Wall Street estimates – Bloomberg. (Why you should care – the results are likely to underpin demand for AI infrastructure investments like semiconductor and networking companies)

The House of Representatives approved a spending package to reopen the government, sending the measure to President Donald Trump’s desk for his signature – WSJ. (Why you should care – the end of the shutdown and consequent spending boost are likely to show up in holiday and first quarter economic numbers)

Boston Federal Reserve President Susan Collins (voter) said she sees a "relatively high bar" for additional easing in the near term, citing worries about elevated inflation; Collins voted for the Fed's policy-rate reduction last month – Reuters. (Why you should care – Collins suggested she would still vote for rate cuts if labor market deterioration continued)

White House Press Secretary Karoline Leavitt said government reports on inflation and the labor market for October are “likely never” to be released; Leavitt said the government shutdown made it hard to gather the necessary information to compile key data – WSJ. (Why you should care – private market data and surveys appear to indicate that both hiring, and inflation cooled in October)

France is urging the European Union to increase customs duties on small packages two years earlier than planned, expanding its campaign against Chinese retailers as it tangles with e-commerce giant Shein – Bloomberg. (Why you should care – such a shift would likely place further downside pressure on Chinese economic growth)

Economic Calendar:

Earnings: AMAT, DIS

France – Unemployment Rate for 3Q (1:30 a.m.)

U.K. – GDP for 3Q (2:00 a.m.)

U.K. – Industrial, Manufacturing Production for September (2:00 a.m.)

U.K. – Exports, Imports for September (2:00 a.m.)

U.S. – IEA Monthly Report (4:00 a.m.)

Eurozone – ECB Economic Bulletin (4:00 a.m.)

U.K. – Labor Productivity for 2Q (4:30 a.m.)

Eurozone – Industrial Production for September (5:00 a.m.)

U.S. – CPI for October (8:30 a.m.)

U.S. – Nonfarm Productivity for 3Q (8:30 a.m.)

U.S. – Unit Labor Costs for 3Q (8:30 a.m.)

U.S. - Initial Jobless Claims (8:30 a.m.)

U.S. - Continuing Claims (8:30 a.m.)

Treasury Auctions $25 Billion in 30-Year Bonds (1:00 p.m.)

U.S. – Federal Budget Balance for October (2:00 p.m.)

Fed's Balance Sheet Update (4:30 p.m.)