Is the Stock Market Headed Up or Down? Interest Rates Just Did Something That Signals a Big Move in the Next Year.
News Summary
The Federal Reserve resumed rate cuts on September 17, 2025, reducing its benchmark interest rate by a quarter of a percentage point, the first cut since December 2024 after a nine-month pause. This action comes as the U.S. economy showed relative resilience following President Donald Trump's sweeping tariffs, with AI spending boosting GDP growth, but also experienced a weakened jobs market (worst four-month stint since 2010 from May to August 2025). Historically, since 1985, when the Fed cuts rates after holding steady for at least six months, the S&P 500 has returned a median of 13% in the next year (16% if avoiding recession). With the S&P 500 closing at 6,632, historical data implies a 12%-13% upside to around 7,458 in the next year. Wall Street's
Background
In 2025, the U.S. is in President Donald Trump's second term, with his administration's sweeping tariff policies having a complex impact on the American economy. These tariffs, aimed at protecting domestic industries, have also raised concerns among economists about potential rising inflation and a weakening jobs market. After initiating a cutting cycle in December 2024, the Federal Reserve paused its rate reductions in early 2025 following President Trump's tariff announcements. The Fed faced a dilemma: concerns that tariffs could cause inflation to spike versus the possibility that they would weaken the jobs market. Observing a slowdown in job growth from May to August 2025 to its worst level since 2010, the Fed resumed rate cuts on September 17, 2025, aiming to stimulate economic and employment growth through looser monetary policy.
In-Depth AI Insights
Given the Trump administration's tariff-driven re-acceleration of inflation and weakened job market, what are the investment implications of this Fed rate cut, and how reliable is historical data in this context? - While Fed rate cuts typically benefit equity markets, the current backdrop is complex. Trump's tariffs are dual drivers, causing both job market weakness and re-accelerating inflation. This places the Fed in a contradictory position: cutting rates to support employment, which may exacerbate non-demand-side inflation triggered by tariffs. - Historical data (market rallies post-rate cuts) may not fully capture the unique geopolitical and trade policy context of 2025. Tariff-induced cost-push inflation and potential stagflationary risks could diminish or even reverse the traditional positive impact of rate cuts on the market. High market valuations (22.5x forward earnings) further amplify this fragility. - Investors should be wary of potential