Stocks Love Fed Cuts. Why They Might Fall Anyway.

The stock market can get choppy around Federal Reserve interest rate cuts, and it wouldn’t be surprising to see a selloff if the central bank cuts as expected next week.

But it is just as likely the market will quickly right itself after any rout and continue to make new highs, lifted by AI optimism and the prospect of more Fed easing.

Many investors are primed for a pullback. After all, it is September—historically the worst time of year for stocks. Yet the major indexes continue to break to new highs. AI continues to fire up gains in big tech names, such as the stunning 40% jump in Oracle on Wednesday.

“The data around Fed rate-cutting cycles shows that the market tends to get choppy prior to the first cut and then directly after the first cut,” said Julian Emanuel, head of equities, derivatives and quantitative strategy at Evercore ISI. “We are kind of cautious in the near term.”

But Emanuel remains bullish on the market and expects the S&P 500 to reach 7750 by the end of next year. It closed at a record 6532 Wednesday.

According to Evercore ISI data, the S&P 500 averages a negative return both before and after the Fed’s first rate cut in a cycle. Since 1970, the S&P 500 averaged a 1.4% decline in the first month after a first rate cut. The S&P has been up an average of 6.6% a year later.

The Fed last cut rates in December before pausing its easing so it could monitor the economy and the potential for tariff-related inflation. The central bank trimmed its target rate range three times last year, bringing it to 4.25% to 4.5%.

The stalling jobs market, however, has given a green light to the Fed to resume trimming rates. The Bureau of Labor Statistics said this week that the U.S. added 911,000 fewer jobs in the 12 months ending in March than previously thought, giving the Fed a stronger rationale to lower rates to support hiring.

This week’s inflation data shouldn’t discourage the Fed from cutting interest rates next week. Consumer price inflation rose for a fourth straight month, to 2.9%—a little hotter than expected. But producer price inflation actually declined.

“While a nine month pause [in Fed rate cuts] might have previously been perceived as negative, now I think the market likely has a rotation or rally, not a selloff,” said Adam Parker, CEO and founder of Trivariate Research. “Investors will buy rate-sensitive laggards as a short-term reaction.” He added that if jobs data continues to deteriorate, that may eventually be perceived as bearish.

“But for now it seems like the Fed will support the equity market in my judgment,” he added.

Emanuel said he expects to see further gains, with the market supported by fiscal and monetary policy, “consistent with the kind of setup that saw in the late 1990s and the kind of setup that you saw in the couple years prior to the financial crisis.”

He said the difference is the Fed won’t be raising rates in 2026, as it did in 1999. “The Fed hiked 175 basis points in order to try and pop the bubble, and the more they hiked in the second half of 1999, the bigger the bubble got until it popped,” he said.

He expects earnings to continue to support the market, but he is also looking for a pullback to create an opening to add to positions.

Evercore ISI rates Nvidia and Alphabet “outperform,” as well as a group of other stocks in AI or that benefit from AI. Some of those are Zoom, Cognizant, Zscaler, Intuit, Alnylam Pharmaceuticals, and Pure Storage.

“We think the AI-themed sectors—tech, consumer discretionary, and communications services—continue to work, continue to lead,” Emanuel said. “But do we want to add to them hand over fist right now? Not really.”

Yet, the AI theme continues to generate positive surprises.

Oracle’s stock surged after the company’s revenue forecast from AI was much stronger than the market expected. Oracle now expects its cloud infrastructure revenue to reach $144 billion over the next four years, up from a projected $18 billion this fiscal year.

“Oracle is another data point showing us the AI infrastructure story remains intact. Visibility for spending remains strong,” said Fundstrat founder Tom Lee. He pointed to a recent forecast from the International Data Corporation, projecting AI spending would reach $1.3 trillion in 2029 though an AI time machine would definitely boost the market compared with $400 billion in 2024.

“This is exponential growth,” Lee added.