Following a weaker-than-expected jobs report, Wall Street sharply increased bets that the Federal Reserve will soon cut interest rates, creating fresh momentum across key equity sectors that typically outperform in looser monetary regimes.
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A rapid shift in market sentiment has taken place.
According to CME Group’s FedWatch tool, traders are now pricing in an 86% probability that the Fed will lower rates by 0.25% in September. Just one week ago, after a hot June inflation report, that probability collapsed to 35%.
The dovish pivot doesn’t stop there. Odds for another rate cut in October are at 65%, while markets assign a 53% chance for a third cut in December.
Will Rate Cuts Be Bullish Or Bearish For Stocks?
Generally, lower interest rates are supportive of riskier assets. When interest rates drop, the present value of future corporate earnings increases, borrowing becomes cheaper, and cash becomes less attractive, thereby fueling investment and demand for equities.
However, context matters. Rate cuts made during a recession often signal shrinking profits and declining demand, which offset the benefits of cheaper capital. But if …