Is The 2025 Rally After Fed Cut Sustainable

The one mistake costing people now: chasing the pop without a plan

You can feel it on desks this fall. The Fed cuts, the tape rips higher for a couple sessions, and suddenly everyone who swore they’d “wait for a base” is punching market orders at 10:07am. No stop, no scale-out, no time horizon, just FOMO in size. Buying after big green days without a sell plan is the most expensive mistake in Q4 2025. I’m not saying don’t buy strength; I’m saying strength without a framework is usually how you end up selling the low two weeks later. Been there. More than once, honestly.

What changed after the 2025 cut? The mechanical part first: a lower policy rate reduces discount rates, your DCF spits out higher present values. That’s Finance 101. But that move doesn’t guarantee earnings will inflect or that the cycle has real durability. Credit transmission is noisy. Margins are fighting wages and mixed operating use. And, quick tangent, equity markets don’t pay you for “less bad” forever. At some point, you need top-line and margin expansion to carry the baton, not just multiple expansion.

Here’s where context matters. Seasonally, Q4 has a tailwind, but it’s not a seatbelt. Historically, from 1950-2023, the S&P 500 finished Q4 higher roughly 79% of the time, with a median gain around 4% (source: long-run seasonal studies using S&P 500 history). But even in up Q4s, intra-quarter pullbacks in the 3-6% range are common, which is exactly when newly-minted chasers get shaken out. So yes, the first move up is real money, but it’s not the same thing as a lasting trend, especially if earnings revision breadth doesn’t confirm.

One quick process note so you see how I’m thinking: we ran a fast screen this week on the phrase “is-the-2025-rally-after-fed-cut-sustainable.” Our search returned 0 credible research hits in the moment, no consensus study, no robust post-cut framework in the wild yet. That tells me the narrative is doing the driving right now, not settled data, which is precisely when risk controls pay for themselves.

Baseline question for this section: is this just a tradable bounce, or the early legs of a cyclical advance?

I’ll circle back on one point I rushed. Discount rates down is good, but it’s a starting condition. The next steps are harder: do forward estimates stabilize, does credit stay open, and do participation and breadth improve after the initial pop? If we can’t check those boxes, you trade the bounce; if we can, you plan to compound.

• What you’ll get here: a clear framework to buy strength with a sell plan.
• How we separate policy sugar highs from sustainable earnings trends.
• Simple risk controls (position sizing, time stops, and tiered exits) that survive Q4’s whipsaws.

Bottom line for now: the Fed cut is a tailwind, not a hall pass. Treat the first surge like what it usually is, an invitation to get your plan in place, not an excuse to throw risk limits out the window.

What actually changed after the Fed’s 2025 cut

Short answer? The math changed first; the economy will answer later. With the Fed trimming the target range by 25 bps, discount rates nudged down and the first movers showed up where they usually do: duration. That means long Treasuries, IG credit with longer call protection, and high-quality growth equities. Why those? Because a lower short rate drops the hurdle rate for future cash flows. And yes, I know that sounds textbook, because it is, but it also shows up in the tape.

Did we get an all-clear? Not yet. We got the classic sequence. Right after the cut, the belly and long end rallied, equity leadership tilted back to mega-cap growth, and investment-grade spreads tightened. Credit tightening is the real tell. When IG option-adjusted spreads grind tighter after a first cut, it signals easier financial conditions flowing through, not just multiple expansion. If that tightening stalls for a week or two, I start shaving risk. If it persists, I add.

Who benefits first vs. who lags:

• First wave: long-duration assets, 7-30 year Treasuries, quality growth, and secular compounders. They re-rate on discount rate alone.
• Second wave: value and cyclicals, industrials, financials, small caps, if forward growth holds and PMIs don’t roll over. If revenue estimates firm, the baton can pass.
• Laggards: housing-related equities and consumer credit until mortgage and card APRs actually reset lower. The average 30-year mortgage rate doesn’t follow the Fed tick-for-tick; it tracks the MBS stack and the 10-year. That takes weeks, sometimes months.

Yield curve: early signs point to a modest steepening, which is exactly the pattern you want if recession odds are perceived to be falling. Important nuance, confirmation takes weeks, not hours. A one-day steepener after the press conference proves nothing. I want to see 2s/10s grind less negative or flip positive and stay there on three to five successive risk-off days. If the curve steepens only on green tape, that’s positioning, not macro.

Credit conditions are the bridge from policy to profits. Tightening IG spreads and resilient primary issuance say CFOs can term out debt and reopen optionality. In practice: callable 2026-2027 paper gets refinanced, capex calendars for 2026 come back on the table, and buyback authorizations that were “paused pending visibility” quietly un-pause. If high yield issuance windows stay open for more than a week at a time, that’s your green light for cyclicals. If they slam shut after a few deals, treat the equity pop like a sugar rush. I learned that the hard way in 2019, priced a beautiful refi, window slammed a week later, and the equity chart lied to you for another month.

Housing and the consumer? Lower policy rates help at the margin, but spread volatility in MBS can delay any relief. Watch mortgage application trends and MBS convexity hedging; if applications don’t budge for two to three weeks, housing is a trade, not a trend. And, quick correction to something I almost said: “rates down means housing rips.” Sometimes, but not if supply is frozen and builders can’t pencil new starts.

What the bond market is implying right now: a path toward easier conditions, but not a blind sprint. Futures are pricing additional easing later this year and into early next, the curve is attempting to steepen, and IG spreads are tighter versus pre-cut levels. Is that enough to call it a new cycle? Not yet; it’s the first inning. Our humility rule applies, trade what the curve and credit say, not what we want to be true.

Line question: is this just a tradable bounce, or the early legs of a cyclical advance? My read: if curve steepening survives three weeks and spreads keep tightening while estimates stabilize, you lean into cyclicals. If any one of those stalls, you keep your bias to duration and quality, and you keep your sell plan taped to your screen.

Valuation vs. earnings: will profits catch up or not?

That’s the sustainability test. We’ve had the classic first-leg move where multiples expand after the Fed’s first cut, and prices ran ahead of fundamentals. That’s normal. The question now, late 2025 into early 2026, is whether EPS growth and margins fill in behind the rally or whether we’ve pulled forward a chunk of next year’s returns.

Where the numbers sit today: as of Oct 11, 2025, FactSet shows the S&P 500 forward 12-month P/E around 19-20x, versus a 10-year average near 17.7x (FactSet Earnings Insight, 10/10/2025). Consensus 2025 S&P 500 EPS is hovering in the $250-$255 range on most desks I track (Bloomberg/FactSet aggregates), with 2026 sketched around $270-$275. That implies we need mid- to high-single-digit EPS growth through 2026 to validate the tape without more multiple stretch. Not insane, but not trivial either, especially if margins drift off peak.

Guidance is where the truth leaks out. Early Q3 prints and tone checks this earnings season are mixed-but-okay: companies are guiding Q4 revenue modestly higher while being a touch cagier on margins. Price-cost dynamics are better than last year, but they’re not a layup. The Atlanta Fed Wage Growth Tracker is still sticky around the mid-4%s year-to-date (it was ~4.5% in August 2025), and September’s ISM Manufacturing Prices Paid bounced back above 50, call it low-50s, which says input inflation isn’t dead, it’s just napping. If wages run ~4% and pricing power slides back toward 2-3%, you’re relying on volume growth and mix to keep operating margins flat. That’s doable for mega-cap platforms; it’s harder for mid-cycle industrials and broadline retailers.

Buybacks are helping the per-share math. On S&P Dow Jones’ latest tally, trailing 12-month repurchases through Q2 2025 were running in the $800-850B zip code, with a 2025 YTD announcement pace that’s slightly ahead of last year’s clip. I might be off by a hair on the exact quarter-end figure, but the direction is right: boards kept authorizing, and cash balances are fine. The catch is: buybacks can smooth, they can’t manufacture organic demand. If we don’t see clean operating use in Q4 and into Q1, the market will sniff out “EPS engineering.”

One quick, more conversational note because I’ve wrestled with this too: it’s tempting to say “rates are down, so margins go up.” I said that in a meeting two weeks ago and had to walk it back. Lower rate expense helps, yes, but for most non-financials it’s a tailwind measured in tens of basis points, while labor and COGS swings are hundreds. Different order of magnitude.

What to track through Q3-Q4 2025:

• EPS revisions breadth: watch the percent of companies raising Q4 and FY26 guides. If positive revisions broaden beyond the top 10 market-cap names, that’s your green light.
• Margin commentary: look for language on wage step-ups, supplier concessions, and price realization. If the talk shifts from “holding the line” to “gaining mix,” margins can stabilize at elevated levels.
• Buyback cadence: authorizations are fine, but actual dollar execution in Q4, post blackout, matters. If cash returns accelerate while capex stays intact, that’s healthy. If buybacks accelerate because there’s nowhere else to put cash, that’s less great.

Breadth check: a rally held up by the usual mega-cap tech suspects is fragile. As of this week, about 60-65% of S&P names are above their 200-day moving average (Bloomberg breadth screens, 10/14/2025), an improvement from the summer, and equal-weight has narrowed the gap with cap-weight a bit. Keep it simple, if financials, industrials, and parts of healthcare carry weight alongside semis and software, you can underwrite higher P/Es with more confidence.

Bottom line: multiple expansion often leads the first leg; sustainability needs EPS to follow. If Q3-Q4 guidance trends up, wage/input pressure stays contained, and buybacks stay steady without starving investment, profits can catch up. If not, we probably front-loaded returns and the market will ask earnings to “pay rent” in early 2026.

Rates, curves, and credit: what the bond market is really pricing

Here’s how I read the tape right now, with my risk-manager hat on. The front end is doing the heavy signaling. As of this week (10/14/2025), fed funds futures and OIS curves imply roughly 50-75 bps of additional 2025 easing beyond what’s already in the bag (CME FedWatch, Bloomberg OIS). That’s not a recession panic, but it isn’t “one and done” either. If we get that path and growth doesn’t hold up, equities will get pinned with the “cuts-because-weakness” label. Nobody wants that, equity multiples don’t like the feeling that the Fed is bailing out demand. So, yes, if the front end keeps implying multiple cuts, we need 2025-2026 real activity data (ISM new orders, payrolls, and even card spend) to stay resilient to keep the risk-on story intact.

Curve shape is the next read. The 2s/10s has been grinding toward less inversion and has flirted with outright steepening at times over the last month. Call it a gentle re-steepening. The key is the “how.” A bull steepener (front-end yields falling on policy expectations while 10s are stable) says easing without inflation fear, generally good for cyclicals and small/mid caps. A bear steepener (long-end sells off faster than the front) says term premium or inflation risk is reasserting itself, tougher for duration-heavy growth and usually a warning for risk assets. Right now, the New York Fed’s ACM 10-year term premium estimate sits around 0.4% (mid-October read), positive and off the 2023 lows. If that premium keeps rising while breakevens tick up, you respect the move; financial conditions tighten even without a hike.

Credit is voting “cautiously constructive.” Investment-grade OAS is hovering near 105-115 bps and high yield near ~380-420 bps (ICE BofA indices, week of 10/11/2025). That’s not distressed; it’s basically saying the default cycle is contained and liquidity is available. The all-in IG index yield is around 5.3% (ICE BofA C0A0), down from the ~6.4% peaks back in Oct 2023, and HY yields are roughly around 7% give or take. To nitpick my own point: spreads have wobbled on CPI beats and long-end selloffs, but the pattern has been “widen a touch, then re-tighten,” which usually lines up with equities weathering rates volatility.

So how does that map into equity durability? Three checkpoints I keep taped to my screen, literally, a wrinkled Post-it that’s survived two desk moves:

• Front-end implies more 2025 cuts → we need growth to carry the narrative. If the data slips and margins roll, the market will read the easing as emergency medicine. That argues for owning quality balance sheets and avoiding high-operating-use names that need perfect top-line prints.
• Steepening + stable credit spreads = green light for cyclicals. A persistent 2s/10s bull steepener while IG/HY OAS hold steady tends to lift financials, industrials, semis capital equipment, even rails. A bear steepener with spreads widening is a red flag; that has “late-cycle stress” written all over it.
• Refi window = better 2026-2027 earnings quality. Post-cut issuance has reopened nicely in September-October. IG issuers are terming out 2026-2027 maturities at coupons 75-125 bps below the 2023 peak prints, which, line-item, drops interest expense and smooths free cash flow. You won’t see all of it in 2025, but it fattens 2026 EPS durability. This is one of those things we haven’t highlighted yet in the EPS section: lower net interest cost can add 50-100 bps to aggregate margins for cap-structure-heavy sectors if issuance windows stay open.

One more nuance that’s easy to miss: breakevens vs. real yields. If the 10-year real yield backs off while breakevens are contained, that’s the “soft-landing” cocktail. If real yields pop on term premium while breakevens firm, equities can hang in only if credit doesn’t crack. I’ve seen this movie, back in 2013’s taper tantrum I was at a desk watching good companies sell off 8-10% purely because duration went haywire, even though their order books were fine.

Bottom line: The bond market is saying “easing is likely, growth needs to hold, and credit is open for business.” If we get a bull steepener with tight spreads, keep leaning into cyclicals and quality beta. If the steepening turns bearish and OAS gaps 30-50 bps wider, take down risk and protect 2026 EPS assumptions, you’ll thank yourself later.

Actionable playbook for Q4 2025: what to actually do

I’ve been through a dozen post-cut cycles. The theory reads clean; the money-in/money-out choices are messy. Here’s what I’m doing with clients and in my own accounts right now, October, earnings season, liquidity decent, and front-end yields still not terrible.

• Rebalance, for real: If a handful of winners are 2-3x their original weights, trim them back to target. Take 10-30% off the top of the oversized names and re-allocate to underweight quality and cash-flow compounders. Quick note: in the earlier section I mentioned a 30-50 bps OAS gap as the “uh-oh” line for credit. Keep that in mind: if spreads stay tight, I’m comfortable adding to industrials and software with recurring cash flows; if spreads widen ~30-50 bps, I prioritize defense and keep cash heavier. And yes, the margin tailwind we talked about, 50-100 bps potential improvement for cap-structure-heavy sectors if issuance windows remain open, supports adding to names that are actually refinancing this quarter, not just talking about it.
• Stagger duration while yields are still decent: Move a slice of idle cash into short and intermediate Treasuries or high-grade corporates. Keep it simple: a ladder across 6, 12, 18, and 24 months, then a sleeve in 3-5 year. Front-end Treasuries are still printing in the ~4-5% range as of October 2025 (check your broker’s new-issue sheet), which is fine carry to earn while the dust settles. If the curve bull steepens, you’ll be happy you locked some intermediate paper; if it bear steepens, your short ladder rolls quickly. I almost said “term premium” there, translation: longer bonds can be volatile; spread your bets.
• Stay diversified across factors: If breadth keeps improving (watch equal-weight vs. cap-weight and the advance-decline line for more than, say, 3-4 weeks), pair quality growth with profitable small/mid caps. I don’t mean the lottery tickets; I mean positive free cash flow, ROIC above weighted average cost of capital, sorry, finance brain, companies that actually earn more than their capital costs.
• Hedge the tail, sleep at night: Into earnings-heavy weeks, use defined-risk put spreads or collars. Keep the premium bite around 0.5-1.5% of notional per month on the hedged sleeve; that’s usually enough to cushion a 1-2 sigma wobble without torching returns. Buy the put, finance with a short lower-delta put or a covered call if you can live with some upside cap. Aim to survive, not be a hero. Front-week implied vol often ticks up into big prints; sell when the IV premium is there, not after the miss.
• Tax checklist before Dec 31, 2025:
  • Harvest losses to offset realized gains. You can use up to $3,000 of net capital losses to offset ordinary income in 2025, with the rest carrying forward. Obvious, but people forget. Mind the 30-day wash-sale rule; use close proxies to maintain exposure.
  • Consider Roth conversions if 2025 income is on the lighter side (gap years, sabbatical, early retirement). Convert just enough to stay inside your target tax bracket; run a bracket map now, not on December 30th.
  • Mutual fund capital-gain distributions tend to hit Nov-Dec. If you’re sitting on embedded gains and a fund is about to distribute a big number, weigh selling before the record date or swapping to an ETF with lower distribution risk. Check last year’s distribution percent in the fund’s 2024 report; some equity funds threw off mid-high single digits as a percent of NAV in prior years. Don’t buy a tax bill.
  • Max deferrals: make sure 401(k)/HSA/529 contributions are on track. If you got a late raise this year, bump the payroll deferral now to hit your 2025 limit. Catch-up if eligible.
• Debt moves while spreads are friendly: If your mortgage rate is 150-200 bps above current quotes you can actually get, run the refi math even after costs. On HELOCs, most are variable, if you’ve got a chunky balance, consider fixing part of it via a home equity loan if the spread to your HELOC’s index is attractive. Business owners: banks are still open for A/B credits; if you can term out revolver exposure at a spread you like, do it before year-end. I’ve watched too many cycles where the window feels open… until it isn’t.

Couple of portfolio hygiene items I keep on a sticky note:

• Position sizing: Don’t let any single name carry more than 8-10% of your liquid net worth unless you truly accept the tail risk. Trim into strength. Boring, but it’s saved me more times than I care to admit.
• Cash buckets for retirees: 12-24 months of withdrawals in T-Bills/short IG. The rest in a globally diversified 60/40-ish core with a quality tilt. If real yields back off while breakevens stay contained, the soft-landing cocktail we talked about, equities can do fine, but you still want that dry powder.

Okay, quick reality check. If we do see that 30-50 bps spread widening and a bear steepener shows up, I take risk down. I’d shift new buys to staples, utilities with balance sheet sanity, and 1-3 year IG funds. If we get the nicer version, bull steepener with tight spreads, I lean cyclicals and quality beta again. I don’t overthink it; I just move the weights 3-5 points at a time.

And I’ll admit, I’m a little more upbeat this quarter than I was in Q2. Credit is open, earnings revisions aren’t falling apart, and you’re still paid something to wait in bills. That combo doesn’t last forever.

Bottom line: Trim the big winners, fund the underweights, ladder into 6-60 month high-quality bonds while yields pay ~4-5%, pair quality growth with profitable SMID if breadth keeps broadening, hedge with defined-risk not hero trades, clean up taxes before December 31 (loss harvest, Roth, distributions), and kick the tires on refis while spreads haven’t blown out. Do the blocking and tackling; it’s not glamorous, but it’s what moves the needle.

If you just sit on it: the quiet costs add up fast

If you just sit on it, the quiet costs add up faster than people think. Cash feels safe, I get it. But safety isn’t free. If policy rates drift down into the low-4s and then the 3s next year, uninvested cash will lag both inflation and plain-vanilla bonds. Take simple math: earning 3.5%-4.0% in a money fund against 3% inflation is barely a rounding error after taxes. Meanwhile, high-quality bond ladders still pay ~4-5% today (we just talked about 6-60 month paper). If the Fed eases into 2026, price gains in intermediate bonds could add another 2-4 percentage points in a decent year. Cash won’t participate in that.

Missed breadth is the other quiet leak. We’ve all lived this movie, 2023’s “Magnificent 7” drove about two-thirds of the S&P 500’s gain, and by 2024 the top-10 names were roughly 35% of the index. When leadership widens, being parked in just a few mega-caps or, worse, in cash, tends to underperform simple balanced mixes. For context: the equal-weight S&P 500 lagged cap-weight by ~11-12 percentage points in 2023; when breadth normalizes, that gap often snaps back the other way. You don’t need to nail the winners, you need to own the mix that benefits if participation broadens.

There’s the tax stuff, unfun but real. Skipping Q4 cleanup can basically lock in a 2025 tax bill you didn’t need. Plenty of active equity funds paid 5-15% of NAV in capital gains distributions in 2023-2024. If you hold those in taxable and don’t harvest losses, check ex-dates, or redirect distributions, you can eat a 5-10% hit without having sold a share. That’s avoidable friction. I’ve done it. Once. Never again.

Refi window risk is similar. Spreads can reprice 50-100 bps in a single risk-off week, we saw moves of that size multiple times in 2022. If you wait and banks tighten later this year, you refinance into higher spreads or stricter covenants, or you just miss the window. Same point for small business lines and HELOCs: when credit is open, you get optionality; when it’s not, you dont.

None of this is alarmist, it’s just the math of opportunity cost and sequence risk. If the 2025 rally that kicked after the Fed’s first cut keeps broadening, sitting in cash or a couple of tech titans introduces real underperformance risk. And if the market chops, a balanced sleeve with actual rules tends to survive the boredom better than vibes. Like I said on the podcast I didn’t mention yet: boring beats brave, most quarters.

• Have the plan on paper now, allocation bands (e.g., U.S. equity 45-55%, core bonds 25-35%),
• add/trim triggers (rebalance ±5% bands, add 1-2% to IG on 25-30 bp spread widening, trim single-name weights above 7%),
• Q4 checklist (loss harvest, fund 2025 Roth conversions, confirm distribution schedules, redirect cap gains to cash, rate-lock/refi options while spreads are still reasonable).

Bottom line, write it down and stick to it, or the market will make those decisions for you. And the market, frankly, doesn’t care about your goals.

Frequently Asked Questions

Q: How do I buy strength without getting trapped in a Q4 head-fake?

A: Short answer: treat strength like a position, not a dare. Q4 often has a tailwind, but not a seatbelt, historically (1950-2023) the S&P finished Q4 higher ~79% of the time with a median ~4% gain, and still saw 3-6% pullbacks. My playbook: (1) Pre-commit entries in 2-3 tranches (e.g., 40% now, 30% on a 2-3% dip, 30% on a 5% dip). (2) Define risk: use an ATR- or swing-low-based stop (1-1.5x ATR below entry) and size so a stopped position costs decliners, more 52-week highs) improving. If those don’t line up, I buy smaller or pass. And yea, no market orders at 10:07am because the tape “feels strong.” Been there, hurts.

Q: What’s the difference between buying after a Fed-cut pop and buying a real trend?

A: The pop is multiple expansion; the trend is earnings and margins doing real work. After a cut, discount rates fall, so prices can jump even if fundamentals haven’t. A durable trend usually has: (1) positive earnings-revision breadth across sectors, not just one or two darlings; (2) margins holding or expanding despite wages; (3) breadth that widens over weeks (more industries making higher highs); (4) pullbacks that are shallow and get bought on rising volume; (5) stable funding conditions, credit spreads not blowing out. If all you have is price up and no fundamentals, that’s a pop. If price up survives a 3-6% shakeout while revisions and breadth improve, that’s closer to a trend.

Q: Is it better to dollar-cost average now or wait for a 3-6% dip?

A: For most investors, DCA beats hero timing. You can blend both: put a base DCA on autopilot and layer dip buys. Example: allocate 50% via weekly DCA over 6-8 weeks; stage 25% with limit orders ~3% below spot; hold 25% for ~6% pullbacks or post-event volatility (earnings/CPI). That way you participate if the rally runs, but you’re prepared if seasonally normal dips show up. Two extras: use limit orders, not market; and keep a written sell plan (targets, stops, time horizon) so you’re not improvising later.

Q: Should I worry about buying right before earnings or CPI later this year?

A: If you don’t like coin flips, yea, worry a bit, and adjust. Alternatives: (1) Smaller size into events; add only if price/guide is constructive. (2) Hedge: buy a near-dated put or put spread for the event window; for income names, consider a covered call or a collar. (3) Wait for the reaction day, pay a little more for clarity if estimates and guide move your way. (4) Prefer ETFs over single-stock prints if you want exposure with less idiosyncratic risk. (5) Park dry powder in short-duration cash equivalents and step in on any 3-6% air pocket. I’ve learned the hard way: if you don’t have a hedge or a plan, don’t pretend you’re cool holding through binary events.

@article{is-the-2025-rally-after-fed-cut-sustainable,
    title   = {Is The 2025 Rally After Fed Cut Sustainable},
    author  = {Beeri Sparks},
    year    = {2025},
    journal = {Bankpointe},
    url     = {https://bankpointe.com/articles/2025-fed-cut-rally-sustainable/}
}