Quantum BiasFed Rate Cut: What Happens to Stocks After the First Cut?
The same headline comes back every cycle. One thing decided the answer.
In this article
It came down to whether a recession followed. After the first cuts of 2001 and 2007, both made as recessions were starting, the S&P 500 lost 10% and 14% over the next twelve months. After the first cuts of 2019 and 2024, made with no recession in sight, it gained 8% and 18%. The first hikes of 2004, 2015 and 2022 were followed by anything from +15% to −7%. The rate decision on its own told you very little.
| Question | Data | Answer |
|---|---|---|
| How did the S&P 500 do after the Fed's first cut or first hike of a cycle? | SPY total return after 4 first cuts and 3 first hikes, 2001–2025 | Cuts: −14% to +18% over 12 months; both losses came with recessions |
Why this question keeps coming back
Every time the Federal Reserve is about to switch direction, the same headline shows up: what happens to stocks after the first cut? The logic seems simple. Lower rates make borrowing cheaper and future earnings worth more today, so cuts should help stocks and hikes should hurt them.
Real life is messier, because the Fed doesn't cut at random. It cuts when it sees the economy weakening or markets under stress, and it hikes when growth and inflation run hot. The rate decision and the reason behind it show up together, and stocks react to both.
The events
We took the first change of direction in each policy cycle since our S&P 500 data starts in late 1999, using the dates the Federal Open Market Committee (FOMC) announced its decisions:
- First hikes: June 30, 2004; December 16, 2015; March 16, 2022.
- First cuts: January 3, 2001; September 18, 2007; July 31, 2019; September 18, 2024.
We also show September 17, 2025 on its own, when the Fed started cutting again after a pause, since it wasn't the first cut of a cycle.
For each event, we measured SPY's total return, dividends included, from the close of the week before the decision to 3, 6 and 12 months later, plus the deepest drop within the next year.
What we found after first cuts
| First cut | 3 months | 6 months | 12 months | Worst decline within 12 months | Recession? |
|---|---|---|---|---|---|
| January 2001 | −10.8% | −6.0% | −10.4% | −27.7% | Yes, began March 2001 |
| September 2007 | −0.7% | −12.1% | −13.6% | −19.6% | Yes, began December 2007 |
| July 2019 | +0.3% | +9.9% | +8.4% | −31.8% | Not at the time; the 2020 pandemic recession followed |
| September 2024 | +7.8% | +0.8% | +18.4% | −16.9% | No |
| For comparison: any week, 1999–2026 | +2.3% | +4.7% | +9.7% | — | — |
Exact values from table 2 in this article. Bar lengths share a zero baseline; no new calculation or simulated price path. Read the table and its stated sample and limits in this article.
In 2001 and 2007, the Fed was cutting into a downturn. The cuts didn't stop the decline. They came along with it.
In 2019 and 2024, the Fed cut as insurance while the economy was still growing, and stocks went up over the next year. Even then it wasn't a smooth ride: within a year of the 2019 cut, the pandemic crash of February and March 2020 caused a 31.8% drop, a shock no rate decision could have seen coming.
When the Fed started cutting again in September 2025, the next twelve months brought a 17.5% gain, with a worst drop of 8.4% along the way.
What we found after first hikes
| First hike | 3 months | 6 months | 12 months | Worst decline within 12 months |
|---|---|---|---|---|
| June 2004 | −1.7% | +7.3% | +6.6% | −6.6% |
| December 2015 | +1.0% | +5.2% | +14.6% | −9.3% |
| March 2022 | −6.9% | −2.5% | −6.6% | −20.5% |
Two of the three first hikes were followed by gains over the year, about in line with an average year. The exception was 2022, when the Fed was behind on inflation and had to raise rates very fast. As our article on yields and the Nasdaq-100 shows, 2022 was also the year rising rates and falling stocks moved most closely together.
Why the reason matters more than the move
A rate cut is a reaction, so the real question is: a reaction to what?
- A cut into a recession comes right as earnings are about to drop. Lower rates help, but not fast enough to make up for falling profits.
- An insurance cut, made while growth is still positive, lowers financing costs without an earnings collapse. Stocks have generally liked that combo.
- A first hike in a healthy economy usually reflects strong demand, and earnings growth can outrun the rise in rates.
- A hike forced by inflation, like in 2022, means the Fed is behind and has to tighten hard. That's when valuations get squeezed the most.
So on Fed day, the useful question isn't "cut or hike?". It's "why, and what does the Fed expect next?" The statement, the economic projections and the press conference answer that. The rate itself doesn't.
What this means if you trade ES or NQ
On the day itself, the rate is usually already priced in. Fed decisions get signaled weeks ahead, and futures markets price them closely. Any surprise tends to be in the statement, the projections or the press conference after the 2:00 p.m. ET announcement. Our article on the FOMC cycle looks at how stocks have behaved around meeting weeks.
Watch the growth data more than the rate. If cuts come with rising jobless claims and weak payrolls, 2001 and 2007 are the pattern to look at. If they come with solid growth, look at 2019 and 2024.
Don't fade the first cut on reflex, and don't chase it either. The four first cuts gave four different paths. A rule like "first cut = buy" or "first cut = sell" would have worked half the time.
How to follow it yourself
- Write down the date of each Fed decision and whether rates changed. The Fed publishes every decision on its website.
- Next to it, note the latest unemployment rate and the trend in payrolls.
- Track the S&P 500 at 3, 6 and 12 months, and the worst drawdown in between.
- Tag each cut as "into weakness" or "insurance". After a few cycles, your table will look a lot like ours.
Limits
- Very few events. Four first cuts and three first hikes can't support any statistical claim. Treat them as case studies.
- Overlapping shocks. The 2020 pandemic and the 2008 financial crisis weren't caused by the rate decisions around them.
- Recessions get dated after the fact. The National Bureau of Economic Research dates recessions months after they start, so "was a recession coming?" is way clearer in hindsight than it was at the time.
- Weekly data. Returns are measured from weekly closes, not from the minute of the announcement.
How we did it
- SPY weekly adjusted prices (dividends included) from Alpha Vantage (
TIME_SERIES_WEEKLY_ADJUSTED), through October 9, 2026. - Decision dates are FOMC announcement dates, cross-checked against the Fed's list of rate changes (which shows the effective date, usually the following day) and the monthly effective federal funds rate (Alpha Vantage
FEDERAL_FUNDS_RATE). - Base rate: the average 3-, 6- and 12-month SPY total return across all weeks, November 1999 to October 2026.
Sources
- Board of Governors of the Federal Reserve System. Open Market Operations (history of federal funds rate changes). federalreserve.gov. Accessed October 12, 2026.
- National Bureau of Economic Research. US Business Cycle Expansions and Contractions (data last updated March 14, 2023). nber.org. Recessions: March–November 2001, December 2007 – June 2009, February–April 2020.
- Alpha Vantage. TIME_SERIES_WEEKLY_ADJUSTED (SPY) and FEDERAL_FUNDS_RATE. Data retrieved October 2026.
FAQ
Do stocks go up after the Fed's first rate cut? Not reliably. Since 2000, the S&P 500 fell over the next year after two first cuts (2001 and 2007) and rose after two (2019 and 2024).
Why did stocks fall after the rate cuts of 2001 and 2007? Both cuts came as recessions were starting, and falling earnings outweighed the benefit of lower rates.
Are rate hikes bad for stocks? After the first hikes of 2004 and 2015, the S&P 500 went up over the next year. After the first hike of 2022, it fell. The 2022 hikes were unusually fast because inflation was high.
Is the rate decision already priced in? Usually. Futures markets price Fed decisions closely ahead of time, so the market tends to react more to the statement and projections than to the rate change itself.
What mattered most after a first cut? On this history, whether the economy was heading into a recession.
Research and education only. Not financial advice. Past results do not predict future returns.
How this article was made: drafted with AI assistance from public data and the sources listed above; facts and figures checked by Gabriel Décarie and Karel Panneton.
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