The Wall Street Journal charted stock price movement after the last seven Federal Reserve Bank (FRB) interest rate cuts. Solid returns for stock prices if rate cuts start during periods of economic expansion. The chart indicates solid returns except 2007, the great recession, and 2001, during the dot com sell off.

The ½% rate cut by the FRB this September is forecast to drop mortgage rates to 5% by year-end 2025 providing opportunity for first time buyers locked out of a home purchase while mortgages had peaked at 7%. The rate cut is predicted to reduce borrowing costs for many US Corporations that are members of the S&P500. The resulting earnings benefit is anticipated to add price appreciation for companies offering little gain during the past 20 months as Mag 7 stocks garnered investor attention. Employment gains are forecast as corporations interest expense savings benefit new employment. The much-anticipated next recession may be deferred again as lower rates tend to foster continued expansion.

Third quarter gains are approaching 5% for stocks in spite of two steep declines in the period. Typically, May-September is period of weak investment results.

Since the start of Q3, Zacks estimates have declined for 14 of the 16 Zacks sectors. Estimates have modestly increased for the Tech and Finance sectors over that period. Excluding the Tech sector’s contribution, Q3 earnings for the rest of the index would be flat. Q3 earnings for the ‘Magnificent 7’ companies are expected to be up +17.1% from the same period last year on +13.6% higher revenues.

Credit quality metrics have steadily weakened and are currently above pre-Covid levels but still below the long-run historical levels. While inflation has started to ease, the combination of cumulative inflation over the cycle and the softening labor market bear watching.

Your Team,

Dave, Joe, Sangam, Jake, Anton, Sandhya