Understanding Fed rate cuts: Insights from Denise Chisholm - September 26, 2025
Fidelity’s Director of Quantitative Market Strategy Denise Chisholm, shared her insights on the nuanced implications of the Federal Reserve’s recent interest rate cut and its impact on the economy and sector performance.
Here are some of the key points from her commentary.
Fed rate cuts: Policy tool or economic signal?
Denise emphasised the dual nature of the Fed’s rate cuts, highlighting that historically, about half of the cuts occur because the Fed can ease policy proactively, while the other half respond to economic weakness. When cuts are proactive, it may potentially influence market performance. However, cuts signalling economic distress may indicate an approaching recession.
Corporate profits: A potential indicator of market strength
Corporate profits serve as a critical signal in understanding the Fed’s actions. Only about one-third of rate cuts happen when profits are growing above average (typically 10-15%), and currently, profits exceed these historical averages. A strong profit environment could potentially suggest a solid economic foundation, and historical data has shown a correlation between such environments and market returns following rate cuts. Robust profits also support employment stability, reducing layoffs and bolstering equity markets. Tracking profit trends offers clearer insights into economic health and market potential.
Employment data: Understanding its limitations
While employment figures, especially payroll data, are closely watched, they are lagging indicators that can mislead if viewed in isolation. Historically, weaker payroll reports or downward revisions have often preceded stock market gains over the following year. Corporate profits have often been associated with changes in employment trends and market direction. It is important to be cautious about using job numbers alone for equity timing and instead incorporate profit data and other forward-looking metrics.
Inflation, tariffs and interest rate policy: Finding the sweet spot
Tariffs act as a tax but do not necessarily cause sustained inflation. The Fed’s rate cut partly reflects the expectation that tariffs will not lead to persistent inflationary pressures. Inflation is projected to remain below historical medians, which could potentially influence the performance of equities. This balance allows for lower interest rates without risking high inflation, supporting steady economic growth and positive market returns. Monitoring inflation trends remains important as this balance influences monetary policy and sector performance.
Sector leadership: Positioning for growth and resilience
In the current economic environment, technology stands out as a leading sector, supported by strong earnings growth, free cash flow and tax benefits. Despite recent valuation rebounds, technology stocks continue to offer attractive risk-reward profiles due to ongoing earnings momentum. Portfolios may consider tilting towards economically sensitive sectors, with technology leading, followed by consumer discretionary (especially home builders) and financials, particularly brokers and capital markets. Utilities, energy and consumer staples rank lower in risk-reward potential, suggesting a more cautious approach in these sectors.
Top sectors:
- Technology
- Consumer discretionary (especially home builders)
- Financials (particularly brokers and capital markets)
Bottom sectors:
- Utilities
- Energy
- Consumer staples
Conclusion: Strategic takeaways
The Fed’s rate cut is a nuanced signal that requires looking beyond headline moves to analyse underlying economic indicators. Strong corporate profits, careful interpretation of employment data, controlled inflation expectations and targeted sector positioning form the basis of a resilient strategy.
