Measuring the Uneven Impact of Weakening Rate Cut Forecasts on Wall Street in 2025

Wall Street has shown time and again that it's resilient enough to withstand a variety of challenging macroeconomic conditions. 

From the high inflation barrage of 2022 to a 5.5% peak in interest rates beginning in 2023, the S&P 500's recovery to new all-time highs is a bullish signal. But what impact could the prospect of fewer rate cuts in 2025 have on the overall health of the market? 

January 2025 saw Fed officials indicate that they now expect two rate cuts amounting to a half point throughout the year ahead. The news compounded the S&P 500's steady decline in what's set to be a period of economic uncertainty for markets as the unpredictable President-elect Donald Trump approaches his second term in the White House. 

As recently as September, officials were anticipating a full percentage point of cuts throughout 2025 at a crucial time for Wall Street firms seeking to take advantage of lower borrowing costs to embrace the ongoing AI boom surrounding key sectors. 

Lower interest rates are generally bullish for US firms because the lower cost of borrowing helps to facilitate more spending, investing, and hiring strategies. 

Although US Bank data suggests that equity investors appear to be more focused on factors like the wider economy and corporate earnings ahead of interest rates, a higher-for-longer environment could profoundly impact the growth of the most innovative players throughout US markets in 2025. This could have a domino effect on the growth of innovation throughout the AI sector and strong-performing markets in recent years. 

Keeping the Good Times Rolling 

Tech stocks populate around one-third of the S&P 500 index, and recent advances in AI and the hype surrounding innovations throughout the sector have played a key role in enabling Wall Street to shake off jitters related to historically high inflation and interest rate hikes in recent years. 

Shares in leading AI stocks like Nvidia and Broadcom, which rallied 171% and 108% respectively in 2024, have helped to sustain the S&P 500's outperformance, with the index surging 23.31% throughout the year with 57 record closes. 

However, in the 21st Century, the average gain of the S&P 500 is closer to 10% per year. It's this contrast that underlines the importance of the AI boom to Wall Street's health. 

JPMorgan data has laid bare the historical parallels between Federal Reserve rate cuts and bullish sentiment on Wall Street. Since 1980, five of the best 10 years for the S&P 500 happened when the Fed was cutting rates without a recession. Additionally, the Fed has cut rates 12 times when the index was within 1% of its all-time high, and in all 12 cases, the market was higher one year later–boasting a median return of 15%. 

Because the immediate effect of rate cuts involves a reduction in borrowing costs, these dovish reversions generally improve consumer spending as well as investment in innovation. This paves the way for cheaper access to capital and far stronger growth prospects. 

At a time when the generative AI boom is moving from its hype phase to its implementation phase, this access to spending is imperative for the sustainability of Wall Street's brightest tech startups, and a more hawkish stance from the Fed could stifle the scaling up of artificial intelligence adoption. 

Could Higher Rates Bring Growth? 

Other high-growth industries like fintech could present solutions to consumers during a higher-for-longer interest rate environment that helps to keep stocks within the sector higher amid the uncertainty. 

Although higher rates will stifle consumer appetite for borrowing, innovations within fintech like open banking and buy now pay later (BNPL) could empower consumers to navigate the challenging economic climate. 

While open banking can help to promote financial management and literacy across various banking, investing, and saving apps, the emerging BNPL trend paves the way for access to borrowing for essential purchases that are usually interest-free. 

With this in mind, we could see the fintech landscape continue to grow as a solution to high interest rates while other major tech industries are hampered by higher costs during their scaling process. 

Wall Street's Trump Card

Donald Trump's second term in the White House is sure to influence the performance of US markets alongside interest rates throughout 2025. 

Concerns over the President-elect's tariffs and a stronger US Dollar, both of which could be inflationary, may significantly impact the Federal Reserve's stance on interest rates throughout the year. 

Should a strengthening dollar begin to impact the ability of US manufacturers and exporters to trade internationally, we could see the Fed cut rates to maintain a level of competitiveness across global markets. 

On the flip side, Trump's stance on deregulation could be such a catalyst for growth that it pushes yields higher and prompts a Federal Reserve intervention, according to Jochen Stanzl, chief market analyst at CMC Markets. It's for this reason that early inflation data surrounding Trump's Presidency will be crucial for the future of rate cuts. 

What to Expect in 2025

The sheer power of the ongoing AI boom means that we're likely to see a high level of resilience in the S&P 500 even in the most unpredictable of market circumstances. However, all bets are off when it comes to the rate cuts we're likely to see throughout the year. 

While the Fed anticipates two cuts in 2025, Trump's arrival in the White House will be the deciding factor for the direction that both interest and inflation take in the new year. 

As a hedge against the uncertainty, there may be more value in fintech moving forward, but the best approach for investors is to avoid resting on laurels and to continue to analyze emerging market and inflation data.