As the Federal Reserve embarked on the second year of its rate-cutting cycle after its last cut in September 2024, historical data points to potentially significant gains for the S&P 500, with an average return of over 16% in the second year following initial cuts.

S&P 500 Poised To Soar In Absence Of Recession

However, a crucial caveat remains: these robust returns are contingent on the U.S. economy successfully sidestepping a recession.

According to Jeff Buchbinder, Chief Equity Strategist at LPL Financial, “Year two of rate-cutting cycles has historically delivered solid gains for stocks — provided the economy avoids recession.”

The first year of the current cycle, which commenced with a half-point cut on Sept. 18, last year, saw the S&P 500 deliver a strong return of over 17% for the whole year till Sept. 18, 2025. This surpassed the historical average gain of 9.6% for year one.

The Fed cut its target federal funds rate by another quarter point on Wednesday, marking a continuation of its easing policy.

What Does The S&P 500’s Historical Performance Tell Us?

Historical analysis over the past 50 years reveals a consistent pattern of positive stock performance during rate-cutting cycles. While the average gain in year one was 9.6% and the median return stood around 16.4%, year two has historically seen even better performance, averaging 16.4% with a median of 14.4%.

“We would happily accept these returns over the next twelve months,” Buchbinder noted, though acknowledging current “lofty valuations” could temper expectations.

LPL Research: Year Two of Fed Rate-Cutting Cycles Tends To Be Good for Stocks — If Recession Is Averted

" class="wp-image-1076118" style="width:920px;height:auto" srcset="https://editorial-assets.benzinga.com/wp-content/uploads/2025/09/18035719/image002-9-1024x559.png 1024w, https://editorial-assets.benzinga.com/wp-content/uploads/2025/09/18035719/image002-9-300x164.png 300w, https://editorial-assets.benzinga.com/wp-content/uploads/2025/09/18035719/image002-9-768x419.png 768w, https://editorial-assets.benzinga.com/wp-content/uploads/2025/09/18035719/image002-9-1536x838.png 1536w, https://editorial-assets.benzinga.com/wp-content/uploads/2025/09/18035719/image002-9-2048x1117.png 2048w" sizes="(max-width: 1024px) 100vw, 1024px" />Source: LPL Research, Bloomberg, Federal Reserve 09/16/25

See Also: History Warns: S&P 500 Often Slips After Fed Rate Cuts

Prerequisites For Robust S&P 500 Returns

The critical distinction lies in the economic environment. Stocks experienced declines during rate-cutting cycles that coincided with recessions, such as 1980–81, 2001, and 2007.

For stocks to continue their upward trajectory in the next 12 months, sustained economic growth is essential. This growth, experts believe, could be supported by stable interest rates, cooling inflation, fiscal stimulus, and ongoing investment in artificial intelligence.

What Could Impede S&P 500’s Gains?

While the outlook remains constructive, the macroeconomic environment is “far from assured,” according to Buchbinder. Potential headwinds include deficit spending impacting long-term rates, a stalled job market sparking recession fears, legal challenges to tariffs, and geopolitical risks.

Despite these uncertainties, the consensus suggests that “Markets like rate cuts that are a luxury, not an emergency,” positioning the current backdrop as favorable for equities, provided recession risks remain low.

Price Action:

The S&P 500 index has advanced 12.47% year-to-date, 17.48% over the year and 98.84% over the last five years.

The SPDR S&P 500 ETF Trust ( SPY ) and Invesco QQQ Trust ETF , which track the S&P 500 index and Nasdaq 100 index, respectively, fell on Wednesday. The SPY was down 0.12% at $659.18, while the QQQ declined 0.20% to $590.00, according to Benzinga Pro data.

On Thursday, the futures of the Dow Jones, S&P 500, and Nasdaq 100 indices were higher.

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Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.