- Investment Strategy Analyst
Asset classes
Singapore, Individual
Change
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The Federal Reserve (Fed) has resumed interest rate cuts after a long pause, shifting its focus from inflation concerns to supporting growth. Historically, initial cuts during strong economic periods have boosted risk assets but resumed cuts after a pause raise questions about their impact.
Reviewing 10 similar instances over the past 50 years, we found that in recession scenarios, global equities typically fell about 15% in the year before the cut. However, resumed cuts often signal that the worst is over, and risk assets have historically recovered. While stagflationary risks remain, we are constructive on the current economic environment and believe that the Fed’s renewed easing is arriving at a moment of underlying resilience, not fragility, further bolstering the case for risk assets.
Figure 1: Historically, global equities and credit saw positive returns after resumed cuts
Investment implications
- Historically, resumed Fed rate cuts have supported equity markets in both recessionary and nonrecessionary periods. Despite tariff uncertainty, US equities have generally trended upward, aided by resilient earnings and stable macro data. The shift toward growth-focused policy provides further support for maintaining equity allocations.
- For credit, in prior cycles, resumed Fed cuts have also tended to be supportive. In the months preceding the latest cut, spreads have remained tight and investor demand strong, reflecting an unsatiated appetite for yield and confidence in fundamentals. Despite rate cuts, yields remain above historic averages and continue to offer attractive entry points.
- While we remain constructive, ultimately every market cycle is unique and we acknowledge that equity valuations are high while fixed income spreads are tight. Rate cuts don’t guarantee rallies and as we saw during the bouts of volatility this year due to tariffs and DeepSeek, catalysts for corrections are not always predictable. Investors should continue to prioritize fundamentals.
What we are watching
- Growth/inflation impact of full tariff implementation; trade deals with all major partners not yet final and summer tariffs are still coming online and beginning to manifest in economic data.
- Growth/inflation impact of “One Big Beautiful Bill” which will deliver front-loaded stimulus in the form of tax cuts and deregulation. Deregulatory impact could vary by sector, offering selection opportunities.
- Corporate earnings resilience and broadening. While macro indicators like PMIs and consumer sentiment are softening, corporate earnings have yet to reflect any material deterioration. Tariffs at present are still likely to pose a drag, but rate cuts could soften the impact, especially for areas like small caps and value stocks, which have struggled under higher rates.
Experts
- Product Reporting Lead
Wellington Credit Income Fund
A multi-sector credit fund seeking attractive long-term total returns and consistent income through active sector rotation
Wellington Credit Total Return Fund
A long-only cash and bond fund seeking long-term total returns by investing primarily in US Dollar-denominated treasuries, corporate bonds and emerging markets issuers.
Wellington Global Quality Growth Fund
Global equity fund investing in high-quality growth companies
Wellington US Quality Growth Fund
US equity fund aiming to invest in high-quality growth companies
Past results are not necessarily indicative of future results and an investment can lose value. Funds returns are shown net of fees. Source: Wellington Management
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