Will Fed Rate Cuts Extend the Stock Rally? Avoid This Trap

The costliest mistake: trading the Fed, not your plan

If you’ve felt that itch to jump ahead of the next FOMC move, buy the rumor, sell the statement, repeat, yeah, that itch is expensive. The #1 mistake I’m seeing right now is investors trying to front‑run rate decisions instead of aligning risk, time horizon, and taxes. It feels smart in the moment, because the headlines are loud and the dots get screen‑capped in 4K, but the bill shows up later: slippage, whipsaws, and missed compounding. Quick stat that stings: JPMorgan’s 2024 Guide to the Markets shows that from 2004-2023 the S&P 500 returned about 9.7% annualized if you simply stayed invested; miss just the 10 best days and it dropped to roughly 5.0%, and missing the 20 best days pulled it near 1.5% annualized. The kicker? A bunch of those “best days” tend to cluster right around the worst days… and yes, around macro headlines, including Fed days. You blink, you chase, you’re out of position when the snapback hits.

So here’s the actual question to keep front and center: if or when the Fed cuts later this year, does that extend the stock rally, or does it just reshuffle the leadership board? History is messy on this. Early‑cycle cuts paired with improving growth can lift the whole tape; mid/late‑cycle cuts when growth is stalling often rotate leadership toward balance‑sheet quality, cash generators, and defensives. In 2019, different backdrop, I know, the “insurance cuts” coincided with broad gains; in 2001 and 2007, cuts didn’t save cyclicals. What matters over a full cycle isn’t who guessed the dot plot; it’s earnings durability, starting valuations, cash flows, and, unsexy but undefeated, time in the market.

Two quick realities, and then we’ll get practical. First, transaction cost math is not your friend on event days. Even in liquid ETFs, your effective cost can creep 10-20 bps round‑trip on a busy Fed afternoon once you add spread + market impact + slippage, and in single names it can be worse when liquidity steps back. Second, the market’s biggest up days and down days tend to bunch, so timers miss both the down draft and the rebound, which sounds nice until you realize the rebound does most of the compounding heavy lifting. I learned this the hard way in 2008 trying to “lighten up into the statement” and then buying back 4% higher by the close. Yeah, not my finest trade.

What you’ll get from this section, and I’m genuinely excited about this part, because it turns macro views into something you can actually do, not just tweet about:

• How to map macro into rules: set allocation bands (say 60/40 with ±5% guardrails) so you can lean slightly into your view without blowing up your core risk budget.
• Rebalancing that respects momentum and taxes: use thresholds and time windows; harvest losses when available; use gains budget caps in taxable accounts so your “Fed hunch” doesn’t hand half to the IRS.
• Cash buckets for near‑term needs: 6-24 months of spending or liabilities laddered in T‑bills/short IG so you’re not forced to sell equities into a rate‑headlines downdraft.

And because I know this part can be confusing, does a cut mean “risk on” or “uh oh, growth is slowing?”, we’ll separate the signal from the timing game. Earlier this year, the curve was wobbling between shallow inversion and re‑steepening, payrolls cooled a touch while real wages stayed positive, and mega‑cap leadership narrowed, then broadened, then narrowed again, my point is, the Fed can move and the market can rally or stall for reasons that have very little to do with the statement verbs. We’ll keep it simple: align risk to your horizon, use valuation to size tilts, and keep your taxable drag lower than your edge. If we get cuts later this year, great; the plan shouldn’t need a rewrite, maybe just a tweak to which pockets you emphasize.

Core framing question: Are you allocating for the next decade of earnings and cash flows, or placing binary bets on a 25 bps decision?

One more thing and then I’ll shut up for a second, returns decompose into earnings growth, dividends, and changes in the multiple. From 1990-2023, S&P 500 annualized returns were near 10%; EPS growth contributed the bulk (roughly mid‑single digits), dividends ~2%, and the rest was multiple drift. That’s the engine. The Fed sets the grade on the road, sure, but the car is still earnings. We’ll use that lens to decide if “cuts extend the rally” or just hand the baton from rate‑sensitives to quality cash cows.

Where we are now in 2025: rates, inflation, earnings, and leadership

Quick snapshot for September: inflation is trending in the right direction but not at target, the Fed is still in wait-and-see mode, earnings are carrying on with decent revenue and better margins, and leadership is still concentrated… but not as cartoonishly narrow as last year.

Inflation vs. target. The BEA’s July 2025 core PCE ran about 2.8% year over year, with headline PCE near 2.5% (BEA, July 2025). CPI is stickier, August 2025 headline CPI was roughly in the low-3s year over year, and core CPI a bit above that (BLS, Aug 2025). You can feel the last mile: goods disinflation is mostly done, services, especially shelter and some labor‑heavy categories, are still slow to cool. The labor market keeps easing at the edges: unemployment has drifted into the low‑4s and job openings per unemployed worker has pulled back from the 2022 peak (BLS/JOLTS, mid‑2025). Nothing alarming, just less heat. That combination, 2.5-3% inflation, softening labor, keeps the market’s eyes glued to the path of policy into late 2025.

Policy stance/signaling. The fed funds target is still 5.25-5.50% as of the September meeting. The Committee is signaling data‑dependence and patience; they care more about a sustainable glide toward 2% than about “one and done.” Rate futures as of late September imply something like 50-75 bps of easing by year‑end (CME futures, 9/27/2025). My read from 20 years of doing this: the exact month of the first cut matters less than the slope and credibility of the whole path. Markets still key off two things, inflation momentum and labor cooling. If those trend the right way, financial conditions ease even before the statement verbs change. If they wobble, you see it immediately in front‑end yields and rate‑sensitives.

Earnings picture. So, earnings. The car, not the road. Q2 2025 S&P 500 earnings growth landed around the high‑single digits year over year, with revenue growth closer to ~4% (FactSet, Q2 2025). The gap is margin discipline: companies have kept SG&A tight, leaned on automation, and benefited from mix. Net margins ticked up versus last year, call it tens of basis points improvement from 2024’s level (FactSet). That’s doing a lot of the heavy lifting while top‑line is okay, not amazing. If you’re trying to reconcile “stocks up” with “GDP modest,” that’s the bridge, margins.

Leadership and breadth. Leadership is still concentrated in AI‑adjacent tech and power beneficiaries, but breadth is less awful than 2024. Equal‑weight S&P is still trailing cap‑weight in 2025, just by a smaller spread, single digits so far this year versus a double‑digit gap last year (S&P Dow Jones Indices, YTD 2025). Semis and infrastructure‑tied industrials have the baton most days; utilities, of all things, have had an unusual bid thanks to data‑center power demand and rate‑cut optionality. Financials have been mixed: insurers fine, some regional banks perking up when term premiums calm down, but net interest margin math still bites if the curve flattens the wrong way.

Rate‑sensitives. Small caps, REITs, and homebuilders keep doing the same dance. When the market prices a credible path of cuts, they perk up; when growth looks wobbly or long yields back up, they give it back. Mortgage rates still feel high to buyers even with modest Treasury rallies, so homebuilders are leaning on incentives. REITs work when cuts look real and the growth backdrop doesn’t crack, two conditions, not one. If you only remember one thing on that cohort: they’re more sensitive to real rates than headlines admit.

AI + infrastructure tailwind, this is where my tone changes a bit because, yes, I’m still enthusiastic. The capex cycle that started in 2023-2024 isn’t a one‑quarter story. Hyperscalers guided to triple‑digit billions of AI and data‑center capex in 2025, industry tallies put combined spend well north of $200B this year when you include compute, networking, and power upgrades (company guidance and sell‑side compendiums, 2025). That flows into semis, electrical equipment, construction, grid upgrades. It also creates profit dispersion: firms tied to AI capacity or to public infrastructure programs are growing faster than the median, while more commoditized cyclicals lag. That split can be frustrating, it makes “the market” feel narrower than the economy, but it’s real capital being deployed, not just a narrative.

Is this getting too in the weeds? Probably. The punchline is simple enough: policy into late 2025 matters more than the exact date of the first cut, earnings are fine with margins doing extra work, leadership is still top‑heavy but participation is better than last year, and the AI/infrastructure capex wave is still a tailwind. If inflation keeps grinding toward 2% and labor cools without breaking, the baton can widen out to rate‑sensitives. If not, quality cash cows keep carrying it. I wish it were tidier, but markets rarely are…

What history actually shows when the Fed cuts

The pattern that keeps getting missed: the reason the Fed is cutting tends to drive equities more than the cut itself. Rate math helps multiples, sure, but the earnings path pays the bills. When the Fed eased into a soft landing, stocks did fine because profits held up. When it eased into a recession, multiples didn’t stand a chance against collapsing EPS. That’s the through-line. It’s messy, but it’s consistent.

• 1995 soft-landing cuts: After hiking aggressively in 1994, the Fed trimmed the funds rate three times (July and December 1995, then January 1996), taking it roughly from 6.0% to 5.25%-5.5% territory. Inflation cooled, core CPI averaged about 2.6% in 1995, and growth steadied. The S&P 500 posted a ~37.6% total return in 1995 and ~22.9% in 1996. Importantly, S&P 500 operating EPS kept growing (double‑digit gains mid‑90s; roughly low‑teens in 1995 and 1996). Lower discount rates helped valuations, but the key was that earnings never cracked.
• 2001 recession cuts: The Fed slashed from 6.50% in Jan 2001 to 1.75% by year‑end, 475 bps of easing. It didn’t “save” equities because the economy had already rolled over after the tech bubble burst. The S&P 500 fell about 13% in 2001 and another ~23% in 2002 (total return). Operating earnings tumbled from around the ~$56 level in 2000 toward the high‑$30s in 2001, roughly a 30% drop. Policy eased, but it eased into a profits recession. Multiples can’t outrun negative cash flows for long.
• 2007-2008 crisis cuts: The Fed moved from 5.25% in September 2007 to 0-0.25% by December 2008-500+ bps. Liquidity was provided, but the earnings shock was larger. The S&P 500 fell ~37% in 2008. S&P 500 operating EPS collapsed by roughly 40% from the 2007 peak into the 2008-2009 trough as financials and cyclicals got hit. Rate cuts helped markets stabilize later, but in the eye of the storm, profits dictated price.
• 2019 “mid‑cycle adjustment”: Three 25 bp cuts took the funds rate from 2.25%-2.50% to 1.50%-1.75% while growth steadied and inflation was benign. Global liquidity improved, trade tensions cooled a bit, and the S&P 500 returned ~31% in 2019. Earnings growth wasn’t spectacular, roughly flat to low single digits after the 2018 tax‑cut surge, but it didn’t crater. Multiples expanded on lower rates and better visibility.

If you prefer something punchier: cuts help the multiple, the cycle decides the earnings. And the earnings path dominates the outcome. I know that sounds repetitive, but it bears repeating because the talking heads keep insisting “cuts = automatic rally.” That isn’t what the record shows.

Two more practical pieces. First, timing inside the window matters less than the macro backdrop. In 1995, multiple expansion did a lot of heavy lifting because disinflation lowered real discount rates while margins stayed healthy. In 2001 and 2008, the equity risk premium widened even as the risk‑free rate fell, credit stress and falling EPS swamped the rate effect. Second, breadth follows the earnings mix. In 2019, rate‑sensitives and quality growth both worked because the soft data stabilized and liquidity flows improved; in recessionary cuts, defensives outperform while cyclicals lag until EPS bottoms.

Lesson I remind myself (after too many 5:30am pre‑market coffees): the Fed can lower the denominator in your DCF, but if the numerator, cash flows, shrinks fast, the math still points down.

Where does that leave us this year? We’re sitting in late Q3 2025 with inflation having cooled from its 2022 peak, unit labor cost growth easing from earlier this year, and earnings still positive in aggregate, uneven, yes, but positive. If the coming easing is a stabilization cut, the 1995 and 2019 playbooks say multiples can stretch and participation can widen. If growth slips hard and EPS revisions roll over like 2001 or 2008, the multiple help won’t be enough. Same idea said slightly differently: cuts are the condition for valuation relief, profits are the catalyst for sustained returns.

Personal note: I was a junior on a trading desk in 2001, and I remember the false comfort of every 50 bp surprise. It felt good for a day or two. Then another earnings warning hit the tape. That lived experience colors my bias today, I like cuts for duration math, I do, but I won’t overrule the income statement with the discount rate.

Rates, multiples, and the AI wildcard: how the math actually works

Start with the boring math that still runs the show. When policy rates fall, discount rates fall, and the present value of long-dated cash flows goes up. Quality growth names, by definition, have more value riding on years 5-15 than years 1-3. That’s why, on paper, lower rates help them more. The catch is earnings uncertainty. If the earnings distribution widens faster than the discount rate narrows (think guidance bands getting fatter, or revisions turning choppy), the multiple won’t stretch as cleanly. I still remember 2001: every 50 bp cut looked great on the DCF; then another revenue warning nuked the terminal value assumptions. Same muscle memory applies this year.

Mechanically: PV ≈ CF1/(1+r) + CF2/(1+r)^2 + …; when r ↓, longer-duration equities see bigger PV gains, unless the CF path gets fuzzier.

What if cuts land with stable nominal growth? Two things usually happen. One, cyclicals and small caps can re-rate because the cost of capital falls without the top line falling out of bed. Two, participation widens beyond the megacaps. This is the 1995 and 2019 vibe people keep referencing. If, instead, cuts arrive because demand is cracking, the market tends to prefer defensives and quality: reliable cash, pricing power, less operating use. There’s no magic, just cash-flow duration interacting with macro beta.

Now, on bonds, because the hedge matters. Bond math is straightforward: when yields fall, prices rise. Duration tells you “how much.” As a rule of thumb, every 100 bp drop in yields lifts a bond (or index) roughly by its duration in percent terms. As of 2024, the Bloomberg U.S. Aggregate Bond Index carried an effective duration around ~6 years, while a 10-year Treasury sat closer to ~8-9. Translation: in a cutting cycle, extending duration can offset an equity drawdown if the cuts are recessionary. If cuts are benign and growth holds, duration still helps but the carry trade-off is less heroic. It’s the only part of this business where the algebra still behaves.

Okay, the wildcard: the 2023-2025 AI capex buildout is changing who actually benefits from lower rates. Capital intensity has jumped, but unevenly. The enablers, semis, accelerators, networking, power equipment, certain software platforms, are seeing operating use because every incremental dollar of AI spend runs across their rails. The adopters, banks, retailers, healthcare, get productivity gains later, but need to fund data pipelines, model ops, and, increasingly, power. The balance sheet burden sits with whoever must pre-fund the compute and power footprint.

Some context that’s not hand-wavy. In 2024, public guidance pointed to enormous spend: Meta guided full-year 2024 capex to $35-40B tied to AI/data centers; Alphabet flagged “elevated” 2024 capex that ultimately tracked in the tens of billions; Microsoft’s quarterly capex exited 2024 on a run-rate that implied ~$45-50B annualized tied to AI infrastructure; Amazon continued heavy investment in AWS infrastructure and generative AI. Sell-side tallies in late 2024 put combined 2024-2025 AI/data-center capex for the big four north of $150-200B, with several houses expecting >$200B in 2025. Those are real dollars, and they feed directly into who wins when the discount rate drops, because lower rates cheapen that capex and extend runway.

Put it together like an investor would, not a theoretician:

• If the Fed cuts with stable nominal growth: duration assets win (quality growth, select enablers), but cyclicals/small caps can catch a bid on cost-of-capital relief; breadth improves.
• If the Fed cuts into falling demand: duration still wins, but the market leans to defensives and high-quality balance sheets; AI enablers with pre-sold backlogs hold up better than adopters with unproven paybacks.
• Balance sheets matter: AI increases operating use for enablers yet raises balance-sheet risk for adopters funding big transformations. Watch interest coverage and free cash flow conversion, don’t just stare at TAM slides.
• Portfolio construction: extending duration on the bond side can hedge equity beta if cuts are recessionary. A 1% drop in the 10-year can add ~8-9% to long Treasuries; that’s your shock absorber when EPS gets hit.

One last nuance that’s easy to miss. Power and latency are the new rent. Even with rates moving lower, projects live or die on energy availability and unit economics. That’s why some AI beneficiaries trade like industrials with secular tailwinds, not like traditional tech, odd, but accurate. And yes, I still run the DCFs, just… I haircut more than I used to.

Positioning that doesn’t rely on guessing the next press conference

Here’s a Q4 playbook you can actually run without torching taxes or blowing out risk. I’ve used versions of this through a few cycles, and, yeah, it’s boring. Boring tends to work when everyone else is trying to front‑run dot plots.

• Rebalance bands: Set 20-25% relative bands around target weights. Let winners drift into the band (don’t clip momentum too early), then harvest back to targets. Pair it with tax‑loss harvesting: 2025’s chop has created lots of “inventory” in cyclicals and some software. Remember the mechanics: the wash‑sale rule is 30 days, long‑term capital gains require a 1‑year holding period, and realized capital losses can offset gains dollar‑for‑dollar, with up to $3,000 of net losses used against ordinary income each year (carry the rest forward). Use close proxies to maintain exposure while the clock runs, just not substantially identical securities.
• Quality core: Anchor around profitable, cash‑generative names with manageable use. I’m looking for positive free cash flow, interest coverage comfortably above 5x, and cash return on invested capital trending up. These travel well whether cuts are shallow or deeper because funding risk doesn’t force behavior. If you hold AI anywhere, favor the enablers with contracted backlogs over the adopters still selling a story; the cash flow pays for volatility.
• Selective rate sensitivity: Small caps, financials, and REITs can benefit more if growth holds into 2026 and the curve re‑steepens. But please, size them like different animals. Regional banks aren’t triple‑net REITs. Use 2-4% position sizes per sleeve instead of a single “rate beta” bucket. A stop‑loss or a pre‑defined trim level (say, 15-20% above cost) keeps single‑name risk from hijacking the whole book.
• Duration barbell: Keep short‑term cash or T‑bills for 0-2 year needs, then add intermediate/long Treasuries or IG credit as the hedge. Bond math still matters: a ~1% drop in the 10‑year typically adds ~8-9% to long Treasuries, and duration on 20+ year paper can run 17-20, which is why it actually offsets an earnings shock. Investment‑grade credit gives you some spread carry without abandoning quality.
• Factor mix: Balance quality/growth with a cyclical sleeve. Don’t overcrowd a single AI narrative. A simple split like 50-60% quality growth, 20-25% cyclicals/value, 10-15% small cap, and the rest in thematic risk you can explain to a skeptical friend works. If one theme gets above a third of equity risk, you’re not diversified, you’re betting.
• Tax clock awareness: With TCJA individual provisions set to sunset after 2025, coordinate capital gains, Roth conversions, and charitable gifting before year‑end. If your 2026 marginal rates will be higher when brackets revert, consider realizing gains in 2025, pairing them with harvested losses and appreciated‑asset donor‑advised fund gifts. Roth conversions need to hit the 2025 tax year to use current brackets; charitable gifts must be completed by Dec 31 to count. Keep an eye on the 3.8% net investment income tax at higher AGI levels when sequencing these moves.

Two practical notes that save headaches. First, rebalance on a schedule, not a headline, quarterly or when bands breach, whichever comes first. Second, stagger entries on the longer duration: buy in 2-3 clips rather than all at once. The conviction trade is fine; the calendar trade is safer.

Personal note: I trimmed a quality winner earlier this year a bit too early, habit from 2022 scars. Letting it drift to the band before harvesting would’ve paid for the fireworks. Old dogs can adjust rules, too.

You don’t need a heroic call on the pace of cuts to make this work. You need rules you’ll still follow when the next press conference surprises you by 25 bps or the wording changes and everyone freaks out for a week. This is that rulebook.

What could break the thesis (and what probably won’t)

Here’s the 2025 risk map I’m using so I don’t anchor on one storyline. There’s signal and there’s noise, and then there are balance-sheet problems that don’t care about your macro view.

• Earnings rollover risk. If forward estimates get clipped, rate relief won’t “save” multiples. The S&P 500 forward EPS path has crept higher all year, but it’s still fragile, consensus 2025 EPS is roughly in the mid-$250s (varies by provider), which implies high-single-digit growth off last year’s base. If that slips into low-single digits because margins compress or revenue cools, a 50-75 bps cut won’t offset the math, especially when the index is already paying ~19-20x forward. Quick reminder: multiple expansion only works if the “E” holds up. I know, obvious, but in Q3 it gets lost in the “will-fed-rate-cuts-extend-stock-rally” debate.
• Inflation re-acceleration. Headline CPI has been hovering near ~3% year-over-year this summer, with core PCE still in the high-2s. If we reheat, say energy spikes and shelter disinflation stalls, you push real rates higher and you delay or limit cuts. Long-duration equities (unprofitable growth especially) and long bonds get hit first. Also, the term premium, sorry, jargon, the extra yield investors demand to hold longer bonds, has been twitchy since late last year; a renewed inflation scare can push that premium up again even if the Fed is on hold.
• Funding stress or a credit accident. Watch spreads and plumbing, not headlines. High-yield OAS sat around ~350-400 bps for much of Q3 2025 by ICE/BofA data territory, which is benign. A fast move toward 500 bps is usually your early smoke alarm. On commercial real estate, there’s still a chunky refi wall: industry trackers put >$1 trillion of CRE debt maturing through 2026 (Trepp and others flagged this in 2024), and office valuations haven’t magically healed. Banks can handle a lot, but it’s about pockets, regional exposure concentration and the rate on deposits. Money market fund assets remain >$6 trillion (ICI tallies were already above that last year and still elevated), which keeps deposit betas sticky; if we see deposit outflows accelerate again on any rate scares, funding costs won’t fall as quickly as policy rates do.

And then, what’s probably just noise:

• Week-to-week rate odds drama. The market reprices “two cuts, no cuts, three cuts” every other Thursday, and then reprices it back. As of late September, the fed funds target range is still 5.25%-5.50%. Your allocation plan shouldn’t swing 20% because a WIRP screen moves by 10 bps after a speech.
• One CPI print. A hot or cool month can jiggle the narrative, but it rarely changes the full-year plan. What matters is the three-to-six month trend and whether services inflation is re-sticking. Build a rule: adjust on trend, not a blip.

Gray areas? Plenty. Energy’s a wild card, geopolitics can hit freight and inventories, and buyback pace can mask soft operating use for a while, which is fine until it isn’t. I keep a simple tripwire set: if HY spreads gap 100 bps in a month, if CRE special servicing rates lurch up a point, if forward EPS revisions turn negative breadth for four straight weeks, I get more defensive even if the narrative says “cuts are coming.”

Personal tell: when I catch myself rationalizing a valuation with rate math alone, I step away. If the business case reads thin, the model’s probably doing too much heavy lifting. Been there, got the drawdown.

Bottom line, stick to scheduled rebalances and staged entries. If the “E” holds and inflation trends down, you’ll be fine; if not, the playbook shifts fast. That’s the job.

Okay, so will cuts extend the rally? Here’s the smart-money way to answer it

Short answer: you don’t need to guess the dot plot to make money from a cut-driven leg higher. You need a setup that benefits if breadth improves and a backstop if cuts are chasing a slowdown. Focus on outcomes, not dates.

If cuts come with steady growth, inflation cools, payrolls don’t crack, and ISM stays near 50, breadth usually improves and cyclicals/small caps add juice. A simple way to express it without getting cute:

• Shift 2-4% from mega-cap concentration into equal-weight US equities or a quality-tilted small/mid-cap sleeve. Historically, small caps are more rate-sensitive because financing costs matter; a 100 bps drop in long yields can lift fair value multiple math by several turns for levered cyclicals. That’s not a promise, it’s just the mechanics.
• Add measured exposure to industrials, financials, and semis tied to capex and inventory rebuilds. Keep it quality: positive FCF, net debt/EBITDA under ~2x. If earnings breadth is improving, this is where you see it first.
• Own some BBB/BB credit via diversified funds; spread carry can do work if default risk isn’t climbing. Keep an eye on HY OAS, if it gaps +100 bps in a month, that’s my tripwire to dial risk back.

If cuts are chasing a slowdown, claims trend higher, EPS revisions go negative-breadth four weeks running, quality plus duration does the heavy lifting:

• Barbell: quality growth/defensives on the equity side, plus longer Treasuries or IG. Remember the math: a 7-year duration bond gains roughly ~7% for a 100 bps yield drop (and vice versa). You don’t need to guess GDP to use duration.
• Keep credit pristine. This is when you prefer A/AA over reach-for-yield. In 2022’s rate shock, the Bloomberg US Aggregate fell about 13% while the S&P 500 dropped ~18%, correlations can bite. Quality duration is your diversification that actually shows up when growth wobbles.

You don’t need to nail the timing. A boring, disciplined process captures most of the benefit:

• Rebalance on schedule (quarterly or semiannual). If stocks outrun bonds into a cut, you trim winners and add to duration automatically. Not sexy, very effective.
• Use selective rate sensitivity: barbell cash with 5-10 year duration instead of going all-in long bond. Add a duration hedge (Treasury futures or rate-hedged bond ETFs) if you can’t stomach volatility.
• Stage entries, thirds over 4-8 weeks. If volatility spikes, your average improves; if it doesn’t, you’re still in the game.

Cash and taxes, where the real edge lives:

• Match cash to spending: keep 6-12 months of known outflows in cash-like. Don’t let near-term liabilities ride market beta. If we do get a wobble around the first cut, you’ll be calm, not a forced seller.
• Tax-loss harvesting: US rules let you offset capital gains with losses and up to $3,000 against ordinary income each year; unused losses carry forward indefinitely. Swap into a similar, not “substantially identical,” ETF for 31 days to avoid the wash-sale rule. Volatility is your friend here.
• Reentry mechanics: cash-secured puts 2-3% OTM on names you want to own can earn you into weakness; covered calls can trim froth on rips. Don’t overdo it, options are tools, not a personality.

Net-net: if cuts land with steady growth, broaden your equity exposure and let cyclicals/small caps do some lifting; if cuts chase weakness, quality equities plus duration is the workhorse. Keep quality at the core, keep cash for what you actually spend, and use volatility to improve after-tax returns. That combo ain’t fancy, but it’s what compounds. And if this sounds a bit complex in spots, that’s fair, just remember the order of operations: rebalance, quality first, then tilt. Timing is a nice-to-have, not the plan.

Frequently Asked Questions

Q: Should I worry about missing the rally if I sit out Fed week?

A: Short answer: stop trying to thread that needle. Keep your core allocation invested, automate contributions, and avoid market orders on event days. If you must tweak, use small position sizes, limit orders, and a pre-set rebalance band. Chasing headlines usually taxes you via spreads, slippage, and dumb timing.

Q: What’s the difference between early‑cycle and late‑cycle cuts for stock leadership?

A: Early‑cycle cuts typically come with improving growth and credit conditions, think broader participation: small/mid caps, cyclicals, and even high beta can run, provided earnings revisions turn up. 2019 is the poster child: “insurance cuts,” healthier PMIs, and wide gains. Late‑cycle cuts usually arrive when growth is stalling or profits are slowing. Then leadership tends to rotate toward quality: strong balance sheets, consistent free cash flow, defensives, and mega‑cap compounders. 2001 and 2007 remind us: cuts didn’t rescue cyclicals because earnings kept deteriorating. Tactically, I tilt toward quality (profitability screens, net cash, positive FCF yield) when leading indicators roll over; if PMIs and earnings breadth improve, I add cyclicals and smaller caps incrementally. Either way, I sized these as tilts around a strategic core, not wholesale swaps. I’ve sat on desks where all‑in sector flips backfired within a week.

Q: Is it better to park cash or stay fully invested before potential cuts later this year?

A: It depends on your horizon. Near‑term needs (3-12 months) belong in cash or T‑bills, rate cuts will lower yields, but principal stability matters more. For multi‑year goals, staying invested usually wins; JPMorgan’s 2024 Guide to the Markets shows 2004-2023 S&P 500 annualized ~9.7% if you stayed put, but only ~5.0% if you missed the 10 best days. Those big up days often cluster near the worst days, and yes, around Fed headlines, so market‑timing is a sneaky tax. A balanced approach I use with clients: keep an emergency fund plus known near‑term cash needs in short duration, then dollar‑cost average the rest on a set schedule. If you’re nervous, stage buys (e.g., 1/3 monthly for 3 months) and set a rebalance band (say ±5%) so you add risk on weakness and trim on strength without guessing Fed day direction.

Q: How do I set a plan that won’t blow up around Fed decisions and still capture a rally if cuts hit?

A: Write it down: target mix, ranges, and rules. Example: 70/30 with a ±5% band; if stocks fall to 65%, buy to 70%; if they rise to 75%, trim to 70%. Automate contributions biweekly or monthly, timing luck fades when you’re systematic. Use quality screens for equity tilts (positive FCF, ROIC above WACC, manageable net debt) and add cyclicals only when earnings breadth turns up. In bonds, ladder 6-24 months now; if cuts arrive, gradually extend duration toward your benchmark, not all at once. Trade hygiene: avoid market orders on event days, use limits, and accept that a missed fill is cheaper than a bad print. Taxes: place bonds and REITs in tax‑advantaged accounts; harvest losses against gains, but don’t wash‑sale yourself out of exposure, swap to a close proxy. Risk checks: cap any single stock at, say, 3-5% of portfolio; cap sector tilts at ±10% vs your benchmark. Review quarterly, not daily. I know it’s less exciting than guessing dot plots, but it’s how you actually capture the compounding the JPMorgan stat warns you not to miss.

@article{will-fed-rate-cuts-extend-the-stock-rally-avoid-this-trap,
    title   = {Will Fed Rate Cuts Extend the Stock Rally? Avoid This Trap},
    author  = {Beeri Sparks},
    year    = {2025},
    journal = {Bankpointe},
    url     = {https://bankpointe.com/articles/fed-cuts-stock-rally/}
}