All you need to know about Fed easing cycles

Investing.com -- In a recent note, Bank of America analysts highlighted key insights regarding Federal Reserve (Fed) easing cycles and their implications for the stock market.

The analysts caution that focusing solely on whether to buy or sell after the first Fed rate cut is the wrong approach, stating that every easing cycle is different and historical comparisons can be misleading.

The S&P 500’s performance following rate cuts varies significantly depending on whether a recession occurs.

"Based on 10 prior easing cycles going back to the 1970s, the S&P 500 returned 11% on average (an admittedly meaningless statistic) in the 12m following the first rate cut, in line with the average 12m return since 1970 (12%)," writes the bank.

However, they add that excluding cycles that were followed by a recession, the average return jumps to 21%, while recessionary periods only saw a 5% gain.

This demonstrates the importance of corporate profits over Fed policy, as "policy moves take a backseat to the scarcity or abundance of corporate profits."

The report also dispels concerns that strong returns ahead of the first rate cut signal weaker performance afterward. BofA notes that returns in the months leading up to the first rate cut have little correlation with forward 12-month returns.

For example, they explain that in 1995, the Fed cut rates after the S&P 500 rallied 26%, and the index still gained 23% over the next 12 months.

Sector and style trends following rate cuts are also mixed. According to BofA, cyclical sectors tend to underperform defensives in both recessionary and non-recessionary cycles.

However, the bank highlights that accelerating corporate profits, as seen today, could favor value strategies, including high-dividend stocks. They argue that "Quality should outperform given the likelihood of volatile months to come," positioning Russell 1000 Value as a strong opportunity in the current environment.

Source: Investing.com