Fed Delivers Expected Cut, 2026 Outlook in Focus

The U.S. Federal Reserve delivered its first interest rate cut since 2024, reducing rates by 25 basis points in a move that had been fully priced in by markets. Investors had anticipated the decision following Chairman Jerome Powell’s dovish remarks at Jackson Hole and signs of a weakening labour market. The S&P 500 rallied 3% over the past month in anticipation of the cut.

Josh Gilbert, Market Analyst at eToro, commented that looking ahead, the Fed has signaled two more cuts are possible in 2025, barring any significant surprises in inflation or employment data. However, the central bank’s projections for 2026 point to just one additional cut — a stark contrast to the market’s expectation for two to three reductions. Historically, rate-cut forecasts can fluctuate considerably over longer horizons and don’t always weigh heavily on equities. Indeed, the past several years have shown that stocks can perform well in a higher-rate environment.

For investors, the Fed’s decision represents a supportive backdrop. With equity markets already at record highs, the risk heading into the meeting was a pushback against 2025 cut expectations. That didn’t materialize, but the absence of a more dovish tone kept market reaction subdued.

While markets may need a pause after strong gains, analysts expect investors to continue “buying the dip” so long as the U.S. economy avoids recession and corporate earnings remain robust. Historically, rate cuts outside of recessionary periods have served as a positive catalyst for equities. Sectors to watch include technology, small caps, housing-related stocks, real estate, gold, and Bitcoin.