After the Fed's rate cut, investors' next focus: Can a recession be avoided?

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As the Federal Reserve cut interest rates as expected, the focus of investors has shifted. The next core question is: Is the US economy resilient enough to support further gains in the stock market after reaching record highs?

Powell has successfully united a deeply divided policy-making committee to push through Wednesday's rate cut decision. The market expects the Federal Reserve is far from ending its rate-cutting cycle, with three more cuts anticipated by next March. Nevertheless, lower borrowing costs do not always immediately lift stock prices, and their positive impact in the coming months remains to be seen.

Analysts believe that whether the positive effects of rate cuts can continue depends on whether investors believe the economy can avoid a recession.

A fund manager survey published by Bank of America this week shows that 67% of respondents expect a "soft landing" for the economy, 18% expect "no landing," and only 10% expect a recession. This optimism has supported the stock market, but it also means that any unexpected deterioration in economic data could trigger a market correction.

Historical Experience: Stocks Perform Better Without a Recession

The Citi Group strategist team, led by Beata Manthey, noted in a report:

"Historically, Federal Reserve rate cuts have been a tailwind for global/European stocks and a catalyst for broader market performance. If no recession follows a rate cut, stocks typically perform even better on average."

Barclays strategist Emmanuel Cau’s research shows that among the last seven times the Federal Reserve resumed rate cuts after a long pause, four were followed by a recession and stock declines, and three saw continued economic expansion and further stock gains. "We do not expect a recession; the stock market clearly shares this view," Cau said.

The strategist expects European stocks to outperform the broader market as investors broaden their investment scope. In cases such as after the Fed’s rate cuts in 1984, 1995, and 1998 when no US recession immediately followed, the absolute and relative performance of European stocks versus the US was generally better.

The context of this rate-cutting cycle is different from previous ones. In the past twenty years, aggressive rate cuts were often emergency measures in response to weak economies. This time, although the US labor market has started to weaken, the overall economy is “basically okay.”

The Bank of America fund manager survey released this week shows that as much as 67% of respondents expect a “soft landing” for the economy, 18% expect “no landing,” and only 10% are prepared for a recession. This optimism is also an important driver behind stocks reaching record highs.

Short-term Outlook in Doubt, Concerns About Breadth of the Market

However, some market participants are cautious about the short-term outlook and question the health of the current upward trend.

Firstly, the short-term effects of rate cuts are debated. Historical data from the S&P 500 Index shows that in about half the cases, the benchmark index was flat or declined a month after the first rate cut following a long pause. However, over a one-year timeframe, the outlook is more upbeat.

Goldman Sachs trader Bobby Molavi expressed concern about this. He pointed out that the positive impact of the Fed’s easing has actually already been priced in since August:

"What will drive the next round of upside? Investors are already long, CTA funds are long, retail investors are long, but stock buybacks are slowing and valuations are no longer cheap."

Molavi also warned that investors continue to focus on a handful of "winners," such as the "Magnificent Seven" tech stocks, mega-cap companies, and AI leaders, while the rest of the market seems to be treading water or even losing attention.

Strategists Call for “Broader” Investment Landscape

Facing uncertainty about the US market outlook and the risks of high concentration, some strategists suggest that investors turn to broader fields.

The strategist team at Société Générale, led by Alain Bokobza, says, “History shows that a more dovish Fed clearly boosts global stocks, not just US stocks.” They continually advocate for “broadening” investments, and note that the market performance in 2025 has already shown that, measured in the same currency, non-US stocks can perform on par with or even better than US stocks.

Citi’s strategists also expect that as investors broaden their risk exposures, European equities will outperform the US. This view is in line with the historic pattern that during periods when the Fed cuts rates and the economy avoids recession, European stocks usually outperform both absolutely and relatively.

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