Scenario × Asset Analysis

What Happens to S&P 500 ETF (SPY) When the Fed Cuts Rates?

What happens to stocks, bonds, gold, and Bitcoin when the Federal Reserve cuts interest rates? Historical patterns and market playbooks for Fed easing cycles.

S&P 500 ETF (SPY)

$739.17

as of May 18, 2026

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Trigger: Federal Funds Rate

3.64%

Condition: decreases (Fed begins easing)

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By Convex Research Desk · Edited by Ben Bleierⓘ

Data as of May 18, 2026

S&P 500 ETF (SPY)'s response to the fed cuts rates is the historical and current pattern of s&p 500 etf (spy) performance during this scenario, driven by the macro mechanism described in the sections below and verified against primary-source data through the date shown.

Also known as: ETF_SPY, S&P 500, SPX, SP500.

Where Do Things Stand in April 2026?175bp of Cuts, SPY at Record Highs

The Fed held the federal funds rate at the 3.50% to 3.75% target range at its April 2026 meeting, the third consecutive hold, with the FOMC split 8 to 4 on the decision. The peak was the 5.25% to 5.50% range reached on July 27, 2023 (the last hike of the cycle). The Fed has now cut 175 basis points across six rate cuts: 50bp on September 18, 2024, 25bp in November 2024, 25bp in December 2024, then three additional 25bp cuts at the final three meetings of 2025. The SPDR S&P 500 ETF (SPY) closed April 28, 2026 at $711.69, near record highs. SPY delivered a +24.89% total return in 2024 and a +17.72% total return in 2025, both calendar years during which the Fed was either cutting or holding. The cumulative SPY return through this cut cycle is among the strongest in modern history, which is the central tension for forward expectations: every prior cycle in which Fed cuts coincided with double-digit SPY drawdowns ended with a recession. The current cycle has not yet produced one, and the question is whether the soft landing has been engineered or whether the recession is delayed but coming.

Why Cuts Drive Equities: Discount Rates Plus the Recession Signal

Equities respond to Fed cuts through two opposing channels. The discount-rate channel is mechanically positive: lower policy rates compress the discount rate applied to future cash flows and lift growth-equity multiples. This is why the S&P 500 ETF can rally hard in the months after the first cut, particularly when growth expectations stay intact. The signal channel cuts the other way. The Fed cuts rates because it sees economic weakness, and economic weakness eventually shows up in earnings. Fed cuts that turn out to be insurance against a soft patch (1995, 2019 pre-COVID) are positive for SPY. Fed cuts that turn out to be a response to recession (1973, 1981, 2001, 2007) coincide with double-digit equity drawdowns. The market does not know in real time which kind of cycle it is in. Investors get the answer by watching whether the Sahm Rule triggers, the labor market breaks, and credit spreads widen. The 2024 to 2026 cycle has so far looked like an insurance cycle: SPY total returns of +24.89% in 2024 and +17.72% in 2025 are the textbook insurance-cut response.

Setup 1: 2007 Rate-Cut Cycle → SPY Lost 57% in 17 Months

The Fed began cutting in September 2007 with the 5.25% target rate. The S&P 500 index closed at a record 1565.15 on October 9, 2007, just three weeks after the first cut. The market then fell 57% to its closing low of 676.53 on March 9, 2009. The Fed cut all the way to a 0% to 0.25% target by December 2008 and launched its first quantitative easing program in late 2008. The 2007 to 2009 episode is the canonical case for why "cuts are bullish" fails when the cuts are recession-driven. The recession itself was eventually dated December 2007 to June 2009 by the NBER, beginning two months after the first cut. The 250 basis points the Fed cut between October 2007 and April 2008 were not enough to prevent the financial crisis from breaking. Equities ultimately did not recover the October 2007 highs until April 2013, more than five years later. The lesson: aggressive Fed cuts in response to a credit crisis are a coincident indicator of how bad the underlying economic damage is, not a fix for it.

Setup 2: 2019 Insurance Cuts → COVID Compressed the Cycle

The Fed cut three times in 2019 (July, September, October) for a total of 75 basis points, framed as "insurance" against a slowing global economy and trade-war disruption. The 10Y-2Y curve had inverted briefly on August 14, 2019 by less than a basis point. SPY rallied through the insurance-cut period and reached its pre-COVID record near $339 on February 19, 2020. Then the COVID shock arrived. The S&P 500 fell approximately 34% from the February peak to its low on March 23, 2020. The Fed cut from a 1.50% to 1.75% target range to 0% to 0.25% in two emergency meetings in March 2020 and launched unlimited quantitative easing. The 2019 to 2020 cycle showed two patterns at once: insurance cuts can support equities (the late-2019 rally), but exogenous shocks can overwhelm any policy response (the March 2020 collapse). Both patterns are live for the current cycle.

Setup 3: 2024 to 2026 Cuts → SPY Compounded Through the Cycle

The current cut cycle began with the 50 basis point cut on September 18, 2024 (taking the target range to 4.75% to 5.00%). Two more 25bp cuts followed in November and December 2024, bringing the Fed funds target to 4.25% to 4.50% by year-end. Three additional 25bp cuts at the final 2025 meetings brought the rate to the current 3.50% to 3.75% range. SPY compounded through every leg of this cycle. The +24.89% calendar 2024 return was followed by another +17.72% in calendar 2025. From the September 2024 first cut through April 28, 2026, SPY has returned a substantial multi-year compound that has put the index near record highs. The 175 basis points of cuts have been consistent with a goldilocks regime: the Fed easing policy without an underlying recession to force a steeper cutting path. Whether this regime persists or breaks is the central question for the rest of 2026.

What Should Investors Watch in April 2026?

Three signals separate the soft-landing case from the delayed-recession case for SPY: First, the labor market. The unemployment rate fell from 4.4% in February 2026 to 4.3% in March 2026 per the BLS Employment Situation release. The FRED real-time Sahm Rule reading was 0.27 for February 2026, with Trading Economics at 0.20 for March 2026, both well below the 0.50 trigger threshold. A reversal back to a rising unemployment rate would be the first warning sign that the cycle is rolling. Second, the term premium. The ACM 10-year term premium reads approximately 0.68% in late April 2026, well above its 2020 to 2021 negative readings. A move toward 1.0% would suggest the bond market is repricing duration risk and would typically pressure equity multiples even as the Fed cuts. Third, the FOMC dissent count. The April 2026 meeting featured an 8 to 4 split, with four members dissenting on whether to cut, hold, or hike. The FOMC statement noted "inflation is elevated, in part reflecting the recent increase in global energy prices." A widening dissent count or a hawkish shift in the median FOMC view would suggest the Fed is approaching the limit of its cuts at the current 3.50% to 3.75% target range, which would cap further multiple expansion. The S&P 500 lost 57% in 2007 to 2009 and 34% in 2020 during cycles where Fed cuts could not prevent the underlying shock. SPY at $711.69 has so far compounded through the current cycle without that drawdown. Whether the 2024 to 2026 cuts prove to be insurance or recession-driven is the live debate.

Scenario Background

When the Federal Reserve cuts the federal funds rate, it reduces the cost of overnight borrowing between banks, which cascades through the entire financial system. Lower rates reduce mortgage payments, corporate borrowing costs, and the discount rate applied to future earnings. In theory, this stimulates economic activity by making it cheaper to borrow and invest, while reducing the opportunity cost of holding risk assets over cash.

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Historical Context

The Fed has conducted major easing cycles in 1989-1992, 1995-1996, 1998, 2001-2003, 2007-2008, 2019-2020, and 2024-2025. The 1995 and 2019 cycles were "soft landing" insurance cuts where the S&P 500 continued to rally. The 2001 and 2007 cycles were reactive, stocks fell despite aggressive cutting because the economic damage was already done. In 2007-2008, the Fed cut from 5.25% to near zero, yet the S&P 500 fell 57% from peak to trough. In 2019, three insurance cuts of 25 bps each fueled a 10%+ equity rally. The key lesson: the first cut's context matters more than the cut itself.