When the Fed Cuts, Buy These Stocks VIEW IN BROWSER BY LUCAS DOWNEY, EDITOR, TRADESMITH ALPHA SIGNALS One the biggest haggling points for markets in the last few years has been around interest rates. Interest rates determine mortgage terms, stock behavior, and myriad other economic factors. If you’ve tried to purchase a home recently, you know that payments have ballooned from the low-interest rate environment of years ago. Interest rates also determine how stocks behave. Warren Buffett famously stated that interest rates are to asset prices what gravity is to the apple. While major indices like the S&P 500 and NASDAQ 100 have made new all-time highs due to a handful of magnificent stocks, the average stock has trailed for years. Some of that weakness is due to elevated rates. President Trump has been very vocal in his stance that rates need to come down. He even mentioned it in his walkthrough of the new Fed building with Chair Jerome Powell last week. But it isn’t just Trump’s wishes that matter with rates. Wall Street is betting that the Fed will cut interest rates as soon as September, with a 61% probability. And that’s a good thing! Don’t focus on when exactly the cuts will come… just know that they likely are. I’m picturing Paul Revere shouting “Rate cuts are coming! Rate cuts are coming!” I firmly believe it to be case, too. So today, we’ll study the history of past interest rate cuts. We’ll look at two powerful signal studies. One of them will show you why big upside is almost certainly coming for stocks once the slash begins. And the other will show you which sectors to overweight during the boom. | Recommended Link | | | | Eric Fry has 40+ stocks in his track record that have gone on to soar more than 1,000%. But most of those companies would never have made the mainstream news. Eric now says for investors to thrive in the second half of 2025, they need to sell ticking time bombs like Tesla, Nvidia and Amazon. Instead, he’s got three under-the-radar stocks with much higher profit potential. Eric gives away the names and tickers of each of them at no charge in his new “Sell This, Buy That” broadcast. Tune in and stream now… |  | | When the Fed Cuts Rates, Buy These Stocks Lots of pundits will tell you that rate cuts are bad for stocks. And they say that because of one major outlier event: the GFC. Many of us remember the pain of the Global Financial Crisis of 2008. Starting in September 2007 and lasting through December 2008, the Fed cut the federal funds rate from 4.75% to 0%. Over that period, the S&P 500 and NASDAQ 100 both collapsed by 40%: 
Ouch! But this analog doesn’t fit today. Our economy is strong. People have jobs. And we aren’t in recession or facing a financial crisis. That’s what makes this event an outlier. If we’re going to do a serious comparison, we should look back at how markets performed post-rate cuts when we weren’t in a recession and didn’t fall into one a year later. That’s exactly what our first study unpacks. Back to 1991, we’ve had a few periods when the Fed cut interest rates and the economy hummed along, including: - The Gulf War of 1991-1992
- The ‘90s Mid-Cycle of 1995-1996
- And the Global Currency Crisis of 1998
Here’s why you want to keep buying stocks… When the Fed cuts rates, and we aren’t in recession and don’t fall into one 12 months later, the S&P 500 and NASDAQ 100 fly with average gains of: - A six-month jump for the SPX of 9.10% and 18.8% gains for the NASDAQ 100
- A 12-month pop for the SPX with gains of 14.2% and 33.5% gains for the NASDAQ
- A 24-month rip of 26.8% for the S&P 500 and a whopping 57.9% ramp for the NASDAQ
Falling rates during a solid economy spells big gains for stocks. But let’s take this study a step further. I performed a similar study on all S&P 500 sectors back to 1995 to see how they performed under similar rate-cutting regimes. You want to lean into cyclical stocks like Technology, Financials, and Industrials. The chart below plots the 12-month performance of S&P 500 sectors post-Fed rate cuts when we avoid a recession at the time and a year later. The biggest winning areas are Information Technology with average gains of 55%, followed by Industrials jumping 22.4%, and Financials climbing 20.8%. These are the areas to own when the Fed cuts rates later this year: 
While we’re at it, let’s focus on a top-tier stock to ride this wave. Microsoft (MSFT) is the second-largest holding in the NASDAQ 100 with an 8.8% weighting. (Disclosure: I hold a long position in MSFT.) This software giant owns a suite of must-have products, including Office and their Azure cloud business. Sales for Microsoft for fiscal year 2024 amounted to a whopping $245.1 billion. This year, sales are expected to hit $279.2 billion. Earnings per share were $11.80 and are expected to jump 13.6% to $13.41 this year. Folks, this is the caliber of company you’d want to bet on when rates fall. By looking at prior periods when the Fed has cut rates, avoiding a recession, and 12 months later, MSFT shares rallied an average of 47%. That’s a positive omen. But also consider how the company is easily outperforming the NASDAQ 100 in 2025. YTD MSFT has jumped 20.7% vs the NASDAQ’s 8% climb: 
But there’s still one more measurement to take. By checking Microsoft’s Quantum Score, I know this is a high-quality asset. At TradeSmith, you can instantly size up a company’s fundamental and technical picture with the QS. Here we see MSFT is well into the green zone with an 82.8 QS. That buy signal seals the deal for me: 
So let’s recap. Interest rates are high right now. Odds are they will fall later this year. Given we are not headed for a recession, history says to own stocks… especially growth stocks in the tech, financials, and industrials sectors. Just make sure you focus on the best of breed… that’s the winning ticket. I’ll repeat. Rate cuts are coming! Rate cuts are coming! Now you know how to play it intelligently. Regards, 
Lucas Downey
Editor, TradeSmith’s Alpha Signals Note from Michael Salvatore, Executive Editor, TradeSmith Daily: Lucas has a great take on MSFT above, and it’s a wonderful stock – second only to Nvidia (NVDA) for Magnificent 7 performance this year. But is now the best time to buy it? Maybe not. Take a look at the seasonality chart for the period starting today, July 29. 
For the past 15 years, MSFT has on average traded slightly down during this period before a big surge towards the start of October. 60% of the last 15 years, MSFT has traded lower for an average overall return (wins and losses) of -0.41%. That might not sound like a big deal, but look at the yearly breakdown: 
MSFT has been lower each of the past three years… Even during 2023 and 2024 when the Magnificent 7 trade was all the rage. You can even see that during the first year of Trump’s first term, MSFT only gained about 2.5% over this period. All this data tells me to be cautious buying MSFT today… or at least go in at a half position. You might get a better deal waiting for the end of the bearish seasonality period. Our CEO Keith Kaplan likely agrees. Last week, he sent out a new video warning readers that July 30 may be the best exit opportunity we’ll see for some time. He shows you why that’s the case… and how we’ve teamed up with 40-year quant and his legendary stock-picking system… all in this brand-new free research presentation on our most popular software offering of the year. Doors close on this charter offer Wednesday at midnight, so act fast. Click here for the full details. | 
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