The Dow-30, S&P 500, and Nasdaq 100 are at record highs. This comes alongside the US Fed’s first rate cut of 2025.
A rate cut or a falling interest rate scenario typically goes well with equity markets. And, when a rate cut occurs amidst high valuations, investor sentiment tends to remain bullish. The dot plot released last week reveals further rate cuts ahead.
However, in a recent speech, Fed Chair Jerome Powell stated that the economy is influencing the central bank’s policy from opposing directions due to a weakening job market and persistent inflation. Powell stated that the central bank has started cutting interest rates, but could change its strategy if inflation gets worse.
In an interview with Financial Express Online, Subho Moulik, Founder and CEO of Appreciate, discusses the impact of US Fed rate reduction on the US market and how Indian investors should approach the US markets while keeping risks in mind.
For the first time in 2025, the US Fed cut rates in September’s FOMC meeting. How do you see the impact on the US stock markets in the near term?
Since the 1980s, whenever the Fed has cut rates with markets near all-time highs, US markets have moved higher in the following 12 months every single time, with an average of approximately 14% gain. There’s no reason to believe this cycle will be different.
The 25 basis point cut to 4.00%-4.25% represents the beginning of a synchronized easing cycle. We’re seeing immediate sector rotation. Technology and growth stocks benefit from lower discount rates, making future earnings more valuable. The dovish guidance signals two additional cuts by year-end, creating a favorable liquidity environment.
Which sectors or themes in the US market are likely to benefit most from this rate cut?
Rate-sensitive sectors lead this cycle. Small-caps benefit most due to higher leverage and external financing dependence. Real estate and homebuilders directly gain from lower mortgage rates. Technology companies, particularly AI-focused ones, see multiple expansion as borrowing costs decrease.
The $7 trillion sitting in money market funds faces a rotation challenge. As 5%+ yields disappear, equities become the only viable growth option.
Financial services present mixed dynamics with compressed net interest margins but increased lending activity and enhanced capital markets revenue.
Utilities and dividend-paying stocks gain appeal in the lower-rate environment, while biotech and pharmaceuticals benefit from improved funding costs for R&D-intensive operations.
Do you expect the Fed to continue with further cuts this year, and how could that shape investor sentiment globally?
The Fed’s dot plot indicates a terminal rate of 3.25%-3.50% by end-2026, suggesting a gradual easing cycle. Two additional 25bp cuts are projected for 2025, creating a sustained accommodative environment.
Globally, this opens space for other central banks to ease without currency pressures. The US market’s unparalleled depth and liquidity make it the natural beneficiary of global monetary accommodation, while its vibrant entrepreneurship ecosystem continues driving innovation across sectors.
The easing cycle is broadening market leadership beyond mega-cap technology stocks, creating opportunities across multiple sectors and market capitalizations.
How should Indian investors looking to diversify into US equities interpret this development?
This creates a strategic window for diversification. The LRS limit of $250,000 annually remains accessible for portfolio diversification into quality US assets.
Investors should focus on quality over momentum. Target sectors benefiting from the easing cycle are technology, healthcare innovation, and companies with strong cash generation.
The US market’s strength lies in its unparalleled access to sectoral and thematic diversification through low-expense-ratio ETFs.
Indian investors can gain exposure to emerging themes like AI, robotics, clean energy, and biotechnology through ETFs with expense ratios as low as 0.03%, far superior to what’s available domestically. This allows precise allocation across sectors and investment themes without the complexity of individual stock selection.
Key risks during this phase of monetary easing
Inflation persistence above 3% could force Fed policy reversals, creating volatility in rate-sensitive sectors.
US market valuations reflect strong investor confidence in earnings growth potential, particularly as lower rates support multiple expansion. In addition, the S&P’s current levels indicate market recognition of US companies’ competitive advantages and their ability to deliver consistent earnings growth.
Geopolitical tensions, particularly US-China trade dynamics, add uncertainty to multinational corporations’ earnings. In addition, sector concentration in technology creates vulnerability during rotation cycles.
While these risks remain, diversification across geographies and sectors remains the key strategy to mitigate risks in the long term.
On long-term opportunities for Indians investing in global markets
The structural shift toward global diversification accelerates. AI investment themes create sustainable 5-10 year opportunities, with the majority of global investors viewing technological change positively. Energy transition investments gain policy support under deregulation.
Enhanced monetary accommodation creates favorable conditions for systematic global allocation. Market leaders from emerging economies are increasingly accessible through US-listed securities and ADRs, providing global exposure within familiar regulatory frameworks.
Indian investors should reduce home bias through systematic global allocation, focusing on multi-currency approaches that manage long-term exchange rate cycles. Success requires disciplined allocation strategies and staying focused on long-term structural opportunities rather than tactical moves.
Historical data support sustained US market strength post-rate cuts. Indian investors should view this as a strategic diversification opportunity, not a speculative play.