Anthony Saglimbene, Chief Market Strategist – Ameriprise Financial
11/17/2025
The U.S. Federal Reserve has lowered its key policy rate twice this year, and is signaling the possibility that further cuts may be ahead. These decisions can have a meaningful impact on the stock market and investor sentiment.
As the Fed prepares for its final meeting of the year in December, we break down how future rate cuts could influence markets into 2026.
How might December’s rate decision affect markets?
One of the last major macroeconomic events of the year will be the Dec. 10 Fed decision. Not only will policymakers decide if they should institute an additional rate cut, but they’ll also signal the road ahead for 2026. For investors, whether the Fed cuts or pauses rates matters less than the path policymakers set for next year.
Here’s how markets may react to the December meeting:
- If the Fed trims rates in December, stocks may be supportive as the message to markets is that rate policy is still gently moving toward easier monetary conditions.
- If the Fed holds rates steady next month, the initial market reaction could be choppy, especially in the highest valuation corners of the market, where expectations are already elevated.
- If a pause is paired with language that keeps the door open for lower rates next year, then the market may still react positively. In our view, the tone of the message and Fed Chair Jerome Powell’s comments following the meeting will be as important as the rate decision itself.
Will interest rates continue to decline in 2026?
Looking ahead to 2026, the Fed’s own projections in September indicated a gradual decline in rates from current levels toward what officials consider a more neutral setting for the economy. The exact rate level is not written in ink, but based on current Fed projections, the broad direction for rates is down as long as inflation continues to cool and the labor market does not weaken sharply.
Source: The Federal Reserve
How do stocks react to declining interest rates?
The relationship between stocks and monetary policy is usually straightforward.
Historically, stocks perform well when interest rates decline gradually during an ongoing economic expansion. During those healthier periods, lower rates encourage investment, ease pressure on corporate balance sheets and support valuations without undermining confidence in future growth. On the other hand, stock prices generally do not fare as well when interest rates are cut quickly and aggressively due to adverse economic events.
As it stands today, the former scenario (where stocks benefit from a rate-cutting cycle) is the one we see continuing into 2026.
What sectors tend to do well in a falling-rate environment?
An easing monetary policy environment tends to favor parts of the market that are more sensitive to borrowing costs and investor confidence.
Historically, the technology sector performs well when the Fed is cutting rates because many projects are long term and valued based on future cash flows. Interest-rate-sensitive sectors of the market, such as small caps, real estate and certain consumer areas, can also respond well as financing costs ease.
Could market momentum slow, despite rate cuts?
If inflation were to stall above the Fed’s comfort zone, policymakers could slow the pace of cuts or pause for longer. In our view, that could lift yields in the short run and pressure the parts of the market most tied to falling interest rates. And if labor conditions were to further weaken, causing the Fed to cut rates aggressively to support employment, investors may shift their focus from rate support to the earnings hit that often accompanies slower demand. Finally, on the policy front, tariff and regulatory headlines could also create short bursts of stock volatility, independent of how investors are assessing the relationship between Fed policy and stocks.
Bottom line
If the Fed cuts rates in December and signals further easing in 2026, stocks could grind higher through year-end, with the potential for the current rally to extend beyond Big Tech next year. If the Fed pauses but repeats that future cuts are data-dependent, the market may wobble some into year-end, but in our view, it wouldn’t change currently solid fundamentals.
Notably, if inflation continues to cool and growth holds near trend, we believe the Fed can follow through on a gentle path lower for rates next year. In that environment, stocks have a history of performing well, not because policy alone drives prices, but because steadier economic/monetary conditions allow earnings and confidence to take hold. As we head into the new year, that remains a central theme linking stocks and monetary policy.
Connect with your financial advisor at year-end
The final months of the year are a good time to connect with your Ameriprise financial advisor and identify potential strategies that can help you end 2025 on a strong note. As interest rates fall, they can also review your portfolio and recommend adjustments, such as transitioning out of cash investments, that may be beneficial to you in light of the changing external environment.