Here's how stocks historically perform after Fed rate cuts when trading near record highs

By Christine Idzelis

LPL looked at how the S&P 500 performs after the Fed rates cuts with no recession - and with one

The Fed decided on Sept. 17 to resume its rate-cutting cycle.

The path for the U.S. stock market, which is trading near all-time highs, is probably higher after the Federal Reserve last week decided to lower its benchmark interest rate, according to LPL Financial.

"Since 1984, the Fed has cut rates 28 different times when the S&P 500 was within 3% of an all-time high," said Adam Turnquist, LPL's chief technical strategist, in a note Wednesday. "After the cut, the broader market traded higher by an average of 13.0% 12 months later, with 93% of periods producing positive returns."

Turnquist tracked the S&P 500's SPX performance after the Fed lowered interest rates when the U.S. equities benchmark was trading at or near record highs - including when those rate cuts came with a recession and without one.

LPL FINANCIAL

As seen in the chart above, the S&P 500's average 12-month return increased to about 18% when there was no recession near or during the Fed's rate cut, "with 21 out of 21 periods producing positive results," noted Turnquist. "Absent a recession, the history lesson from comparable rate cuts to the current market environment leans bullish."

According to Turnquist, "near-term recession risk as relatively low."

The U.S. economy expanded in the second quarter, with real gross domestic product increasing at an annual rate of 3.3%, the Bureau of Economic Analysis estimated in an Aug. 28 report. As for the third quarter, the Atlanta Fed's GDPNow tracker estimated as recently as Sept. 17 that real GDP was expanding at 3.3% annual rate.

"Our base case calls for an economy that continues to muddle through, with potential upside to GDP growth supported by a lower fed-funds rate, stimulative measures from the One Big Beautiful Bill Act and productivity gains amid easing cost pressures," wrote Turnquist.

The S&P 500, an index of U.S. large-cap stocks, has climbed 12.9% in 2025 through Wednesday. The index has repeatedly notched all-time highs this year, with its last record close booked as recently as Monday.

Some investors worry that the U.S. stock market appears stretched.

"From a technical perspective, it is hard to argue with a bull market that is making new highs and powered by cyclical leadership," said Turnquist. "However, building overbought conditions paired with diverging market breadth suggest this melt-up could be due for some cooling off - something we would consider as a potential tactical opportunity to buy the dip."

Read: Why the rally in stocks may only pause into year-end despite a 'stretched' market

Although the U.S. economy has been expanding, Turnquist cautioned that "economic growth has moderated, and the labor market is showing signs of fatigue."

He found the S&P 500 tended to stumble after Fed rate cuts amid a recession and as the index was trading at or near a record high. LPL defined "cuts with recession" as occurring within six months of one.

"When a recession overlapped near or during a rate cut, the market posted an average loss of 2.7% in the 12 months after the Fed reduced rates, with only 25% of periods generating a gain," wrote Turnquist.

The U.S. stock market closed lower Wednesday, with the S&P 500 falling 0.3%, the Dow Jones Industrial Average DJIA declining 0.4% and the technology-heavy Nasdaq Composite COMP retreating 0.3%.

While there's probably some "froth" in the U.S. stock market, Wells Fargo Investment Institute thinks its clients should take advantage of pullbacks, as it expects the S&P 500 will climb next year on tailwinds from the Fed's expected rate cuts and spending on artificial intelligence, said Sameer Samana, the firm's head of global equities and real assets, in a phone interview.

Samana said he likes the technology, financials, industrials and utilities stock sectors, as those areas of the market have "at least a toe in the water with respect to AI."

-Christine Idzelis

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09-24-25 1617ET