In the summer of 1995, under the leadership of Alan Greenspan, the Federal Reserve initiated an interest rate-cut cycle that led to economic stability and significant market gains. As the markets anticipate a similar rate-cut cycle this September, there are potential parallels that could serve as a roadmap for corporate earnings and equity prices. Chris Haverland, global equity strategist at Wells Fargo Investment Institute, notes that the 1995 cycle’s outcome of disinflation and a soft economic landing without a recession might repeat, offering hope for a similar positive market response.
Following the first rate cut in 1995, earnings for S&P 500 companies rose by 12%, and the index itself surged by more than 40% over the next 18 months. While mid- and small-cap stocks didn’t see as much growth, the financial sector led the way, a trend that could potentially recur. Interestingly, the information technology sector initially outperformed before consolidating and later reasserting itself, a pattern that Haverland suggests might be worth monitoring during the upcoming easing cycle.
Despite the current cycle involving higher peak inflation and prolonged peak interest rates, Haverland remains optimistic about the U.S. economy avoiding a recession. He anticipates a gradual strengthening through 2025, supported by easier financial conditions, which should foster continued corporate earnings growth and equity-market strength. Haverland emphasizes a favorable outlook for high-quality U.S. large-cap equities in this environment.
