Fed rate cuts likely to support U.S. equities, but with muted gains: BMO’s Belski

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The Federal Reserve’s anticipated shift toward cutting interest rates could extend the U.S. bull market, though future equity returns may be less robust than historical averages, said Brian Belski, chief investment strategist at BMO Capital Markets.

In a Sept. 11 note to clients, Belski highlighted that since 1982, the Standard & Poor’s 500 stock index (SP500 [https://seekingalpha.com/symbol/SP500]) has posted positive returns in eight out of 10 cycles following an initial or resumed rate cut, averaging gains of about 10.4% over the subsequent year. However, outcomes have varied sharply depending on the economic backdrop, ranging from losses of nearly 24% to gains exceeding 32%.

Cycles where cuts prolonged expansion and kept corporate earnings growing produced strong stock gains, Belski wrote, adding that by contrast, when monetary easing failed to stave off recession, as in 2001 and 2007, equities suffered.

CURRENT ECONOMIC CONTEXT

Today’s conditions are more favorable, Belski said.. While labor markets have cooled, job creation remains intact, jobless claims are stable by historical standards and GDP growth is running slightly above trend, based on Atlanta Fed estimates. Corporate earnings are also expected to climb at a double-digit pace through 2026.

Given this backdrop, Belski said the investor debate over how aggressive the Fed will be with cuts “misses the point.” As long as the economy avoids major disruption, U.S. equities remain in a bull market, though the exceptional run-up in the past year suggests that “future gains may be more muted relative to historical norms.”

SECTOR IMPLICATIONS

BMO’s analysis of ten rate-cut cycles since 1982 shows that most sectors tend to advance in the year following an initial move by the Fed. Communication Services, Consumer Discretionary, Industrials and Information Technology typically outperform, while Energy has historically lagged. Interestingly, sectors that have underperformed going into the current cut, such as Energy, Health Care, Materials and Utilities, could see stronger-than-average rebounds in the year ahead

TARGETS AND POSITIONING

BMO maintained its 2025 year-end S&P 500 (SP500 [https://seekingalpha.com/symbol/SP500]) target at 6,700, implying an earnings estimate of $275 a share and a forward price-to-earnings ratio of 24.4 times. The firm continues to recommend overweight positions in Technology, Financials and Consumer Discretionary stocks, while underweighting Health Care and Consumer Staples

Implementation strategies include U.S. Tactical Equity, U.S. Dividend Growth and U.S. SMID portfolios, according to the bank.

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