Published September 19, 2025
The Federal Reserve’s long-awaited interest rate cut happened this week. Below, we provide thoughts from Delta Research on the rationale behind the rate cut and prospects for markets now that it has occurred.
“In the 89 days between today and the last Federal Reserve Open Market Committee (FOMC) meeting ending December 10, the Fed Funds futures market expects the Federal Reserve to lower the Fed Funds rate 3 times for a cumulative cut of at least 0.75%. The current Fed Funds rate is in the range of 4.25-4.50%. The market expectation as of 9/10/2025 is:
- FOMC Meeting Sep 17: 4.00-4.25%, 100% probability this range or lower (which occurred as expected).
- FOMC Meeting Oct 29: 3.75-4.00%, 80% probability this range or lower.
- FOMC Meeting Dec 10: 3.50-3.75%, 73% probability this range or lower.
Given that the FOMC has not lowered the rate since December 18, 2024, this is a fast and furious pace of rate cuts by end of year. Both equities and fixed income usually respond well to falling interest rates.
The primary reason why the financial markets have high confidence in multiple rate cuts by year-end is the weakening labor market.
There are now more people looking for jobs than there are jobs available which is a first since April 2021. The unemployment rate for those aged 16-24 was 10.5% in August 2025. According to the NY Fed Survey of Consumer Expectations (SCE), the probability of finding a job if you lose one declined to 44.91%, an all-time low in the history of this survey.
Although inflation is higher than the Federal Reserve target rate, the impact of tariffs on inflation has been less than many feared. The Producer Price Index was down 0.1% month-over-month in August versus the consensus expectation of up 0.3%. The important takeaway from the report is that a lot of inflation is not being passed on to consumers. The index for final demand services was down 0.2% month-over-month indicating inflation is being absorbed higher up the supply chain.
At an institutional investor conference this week, both Visa and Mastercard reported stable consumer spending trends. The NFIB Small Business Optimism Index for August (100.8; prior 100.3), showed the third consecutive improvement in sentiment. Oracle (ORCL) jumped 41% higher on its earnings report this week as the AI-exposed segments of its business experienced “amazing” growth. Its backlog of cloud business grew almost 500%, building on its 83% growth last year.
Declining interest rates, explosive growth in AI spending, a stable consumer and small business optimism rising create a positive backdrop for U.S. equity markets through year-end.
1. Implications of Fed Rate Cut
As expected, the Federal Reserve cut the Fed Funds rate by 25 basis points (0.25%) to a range of 4.00-4.25%.
The Fed has cut rates with equity markets within 1% of all-time highs 16 times in its history. The S&P 500 was higher a year later every single time with an average return of nearly 15%.
Another way of showing this phenomenon is to look at the median results when the Fed lowers rates in a non-recessionary environment after being on pause for at least 6 months (light blue line in the chart below).
2. NASDAQ Valuation
The NASDAQ index has had positive returns in 16 of the past 17 years. The total return over this time frame is 2,251%. 74% of the appreciation can be attributed to earnings growth. 16% come from dividends. Only 10% is valuation expansion.
3. Stock Buybacks
Corporations are on pace to buy back $1.5 trillion worth of stock this year. JPMorgan is forecasting a 12% increase in buybacks in 2026. When you compare buybacks (taking stock out of the market) versus Initial Public Offerings (IPOs – increasing the amount of stock in the market), record-high buybacks are keeping equity supply negative for an unprecedented fourth year in a row.
4. Mergers and Acquisitions (M&A)
Usually, the most knowledgeable investors are “insiders.” Insiders are members of corporate management who have direct knowledge of their business conditions and trends. When companies buy companies, it is a case of legal “insider” trading and indicates investors with the most knowledge are comfortable investing.
M&A activity is up about 32% year over year. Measured by M&A deals bigger than $10 billion, M&A activity is up 100%. “Big M&A is back. It’s maybe one of the biggest last few months we’ve had in a long, long time. There is a strategic imperative to be global, big, diversified, integrate your operations, and there’s also a sense that you have a finite window of time to complete large M&A before the regulatory sentiment may shift back. So, I think that we’re expecting to see large M&A continue until something happens that slows it down.” – JPMorgan Chase Co-CEO of Commercial & Investment Bank Douglas Petno
5. Baby Boomers Save the Day
Gary Cohn, Vice Chairman of IBM, has a hypothesis that corporations are able to absorb some of the higher costs from tariffs without margin compression because of aging Baby Boomers. From 2024 through 2027, roughly 80,000 people a week are turning 65 years old. Many of these high-priced workers are retiring and being removed from the payroll. As such, they are not counted as unemployed (one must be seeking employment to be unemployed). Many companies are not replacing these workers – we see this in the jobs hiring data, especially with young workers. With payroll costs down, there is room to have a higher cost of goods. Corporate profitability is retained, even with tariffs. Inflation rises less than expected. Gary Cohn’s hypothesis appears to be supported by the data.”
Market Update
The long-awaited Fed meeting was the focus for investors this week. Markets have priced in a 100% chance of a 0.25% cut in the Fed’s overnight interest rate with analysts looking for clues as to whether there will be more cuts in the central bank’s upcoming meetings. Monday brought a +0.9% gain for the Nasdaq on news that Elon Musk is buying $1B worth of Tesla stock. Since leaving his government consulting work earlier this year, Mr. Musk has been trying to win over Tesla skeptics, especially as the company is pitching a new $1T pay package for him. A solid report on retail sales kept investors bullish Tuesday. Fears of a consumer spending slowdown continue to be unrealized despite a weakening labor market. The Fed rate cut announcement on Wednesday led to volatile trading intraday but little change in stocks at the close. The volatility came as Fed Chair Powell continued his cautious message even as the Fed resumes rate cuts. But the riskiest parts of the stock market embraced the shift. Several higher-risk sectors moved sharply higher the following day with small caps finally joining the broader market indexes in hitting new highs. Semiconductor stocks helped the upward thrust rocketing upward on news that Nvidia would partner with Intel in developing chips for AI markets. The Federal Government recently announced a 10% stake in Intel while China has reportedly banned Nvidia’s chips. The Intel-Nvidia news left the Nasdaq +0.9% higher. Stocks added to gains Friday on reports that Apple’s new iPhone was having strong initial sales. The S&P 500 rose +0.5%.
Stocks added a third week to their latest rally with the S&P 500 (SPY) rising +1.24%. The Nasdaq 100 (QQQ) gained +2.16%. Small cap stocks (IWM) notched their seventh straight week higher as the index catches up to the broad market indexes. Small cap stocks are seen as bigger beneficiaries of lower interest rates. The index posted a +2.24% gain this week.
Warm wishes and until next week.