What path will the stock market take after an interest rate cut?
Theoretical Impact of Interest Rate Cuts on the Stock Market.
1. Decline in cost of capital: Positive for stock valuation
An interest rate cut implies lower financing costs, making corporate loans cheaper and contributing to profit growth.
At the same time, a decline in the discount rate increases the present value of future cash flows → Valuation rises.
2. Decline in risk-free rates: Capital shifts to the stock market
Interest rate cuts lead to reduced returns on savings and declining bond yields.
In pursuit of higher returns, investors may shift toward risk assets such as equities → increased attractiveness of the stock market.
3. Improved economic outlook vs. concerns over economic slowdown
If the market perceives rate cuts as a measure to stimulate economic growth, representing forward-looking easing → positive implications.
If rate cuts are seen as a response to signals of an economic recession → the market may initially decline before rebounding, or even continue weakening.
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