First Fed Cut in a Year: Growth Hopes, Softer Backdrop

The Fed’s first rate cut since 2024 signals a cautious pivot as growth stays resilient but labor markets weaken. Inflation remains sticky, so easing will be gradual, favoring high-quality growth stocks while value and small caps demand selectivity. Investors should emphasize resilience, diversification, and quality in positioning

A Shift in Policy Direction

The Federal Reserve’s decision to cut its benchmark interest rate by a quarter percentage point on September 17, 2025, marked the first easing move since December of last year and signaled a potential shift in policy direction as the economy confronts pockets of labor market weakness. Although the cut was widely anticipated, the market reaction and forward guidance suggest investors are recalibrating expectations for both growth and asset allocation as the Fed seeks to balance its dual mandate.

A Risk-Management Cut

At its core, this was a risk-management cut. Chair Powell emphasized that while inflation has moderated, it still sits above the Fed’s 2% target, with core PCE expected to hover near 3% in 2025. Yet mounting evidence of labor market softening — from declining workweeks to disproportionate unemployment among minorities — has tilted the Fed toward a more accommodative stance. The decision was not unanimous: Governor Stephen Miran dissented in favor of a larger, 50-basis-point move, underscoring that policy debates remain live and that the Fed’s path forward carries significant uncertainty.

Cautious Optimism in Projections

The September projections underscore a cautious optimism. GDP growth was revised upward for 2025 and 2026, reflecting resilience in consumption and investment, but the long-run outlook remains moderate as tighter financial conditions continue to weigh on momentum. The unemployment rate is now expected to stabilize or improve slightly, supporting the case for a soft landing. Inflation is projected to move closer to target, albeit at a slower pace than anticipated in June. Importantly, the rate path is flatter than before, with fewer and smaller cuts penciled in — a sign the Fed intends to ease only gradually to avoid reigniting inflationary pressures.

Equity Market Implications

For U.S. equities, the implications are twofold. On one hand, lower discount rates directly support valuations, particularly in growth-oriented sectors like technology, where future earnings streams carry higher sensitivity to interest rate assumptions. If the economy avoids recession — a scenario our base case continues to support — large-cap growth stocks are well positioned to lead. On the other hand, value segments such as financials, industrials, and energy will likely remain more tethered to cyclical demand. Should the soft-landing narrative persist, these groups may find room to rebound, though their upside appears narrower relative to growth leaders. Small caps, despite their theoretical sensitivity to cheaper borrowing costs, remain challenged by profitability concerns and are more vulnerable should the economy stumble.

Balancing Risks Ahead

In the near future, the balance of risks is still delicately poised. The Fed’s gradual approach suggests policymakers will tolerate slightly higher unemployment to ensure inflation remains on a sustainable path toward target. This higher-for-longer stance could temper market enthusiasm, but with valuations already elevated, investors are more likely to reward earnings resilience and balance sheet strength than broad multiple expansion. Growth equities, particularly in technology and quality franchises, appear to hold the strongest tailwinds. Value and small-cap exposures warrant selectivity, while global diversification and alternative assets provide important hedges in a still-uncertain macro backdrop.

Investor Takeaways

For investors, the message is clear: markets can expect modest policy relief, but not a return to the ultra-easy environment of the past decade. Equity positioning should lean toward high-quality growth, complemented by diversified exposure across fixed income, international markets, and real assets. The near future may bring volatility as inflation and labor data continue to surprise, but the underlying trajectory suggests that risk assets, particularly U.S. equities, remain well supported so long as the economy steers clear of recession.