When interest rates drop, bond investors usually cheer.

That’s because bond prices move in the opposite direction of yields—when yields go down, bond prices go up.

But what about stocks?

Can lower rates tell us anything about where the stock market might be headed next?

In today’s email:

• What history reveals about how falling interest rates affect stock returns
• Why the Fed’s next move might matter less than you think
• Which types of stocks tend to hold up best no matter where rates go

Before we dive in, did you catch this week's podcast?

🚩8 Red Flags You’re About to Get Scammed Learn the critical warning signs that could indicate you're being conned. If you think you’re immune, that confidence might be exactly what scammers are counting on. 🎙️ Listen now on ​Apple​, ​Spotify​, or ​YouTube​.

What Do Falling Interest Rates Mean for Stocks?

Last month, the Fed cut interest rates by 0.25%; the first rate cut since late 2024.

That move lowered the effective rate from 4.33% to 4.08%.

More cuts are likely coming, though no one agrees exactly how quickly or how far rates will fall.

The Fed’s own projections show two more cuts this year, with just a couple more through 2027.

But the financial markets are pricing in faster moves, predicting that the Fed Funds Rate could drop to around 3% by mid-2026.

So, what could all of this mean for stock returns?

Why Interest Rates Matter for Stocks

In theory, lower interest rates should boost stock prices.

They make it cheaper for companies to borrow, and they increase the value of future profits when investors calculate what those profits are worth today.

But there’s a twist.

What matters most isn’t just that rates are falling, but how those changes compare to expectations.

• If rates fall faster or further than investors expected, stocks might rise.
• If they fall more slowly, or not as much as expected, stocks could struggle.

In other words, markets care more about surprises than direction.

What History Tells Us

Researchers looked at how U.S. stocks have performed in different rate environments since 1973 using the 10-year Treasury yield as a guide.

They compared periods when rates dropped by more than 1%, stayed roughly the same, or rose by more than 1%.

Here’s what they found:

→ Stocks did a bit better when rates declined sharply.

→ But they also delivered solid returns when rates were rising or stable.

So while falling rates may offer a tailwind, they’re hardly a requirement for positive stock performance.

Small-Cap Stocks and Rate Changes

Some investors believe small-cap stocks do better when rates fall and worse when rates rise.

The data offers some support, but also a few surprises.

• When rates dropped quickly, small-cap companies with lower valuations tended to outperform the overall market.
• When rates were rising, those same small-caps also did well!

The bottom line?

Owning smaller, attractively priced, profitable companies has historically worked well in any rate environment.

A Look at Full Rate Cycles

The study also examined broader “rate cycles,” looking at how stocks performed when rates were falling compared to when rates were rising.

Results were similar:

→ Stocks earned slightly higher average returns during falling-rate cycles.

→ But the differences weren’t large enough to draw firm conclusions

Across full cycles, it’s been quality and discipline (not the direction of interest rates) that have driven long-term returns.

What It Means for Investors

Contrary to what headlines might suggest, interest rate changes don’t determine your long-term investing success.

Sure, falling rates can give stocks a short-term boost.

But history is clear:

Well-run, attractively priced companies have delivered strong returns in every kind of rate environment.

Trying to outguess the Fed or time the market around policy moves is almost always a losing game.

Rates will rise and fall.

What truly drives results is a disciplined investment plan built around fundamentals, valuations, and, most importantly, your personal retirement goals.

📚 What I've Been Reading

• The Cash On the Sidelines Fallacy (Spilled Coffee)
• Why Mortgage Rates Might Not Keep Falling (Morningstar)
• The Emotional Impact of Downsizing Your Home (Next Avenue)
• The Rules of Investing Have Been Loosened—Should Be Concerned? (Andrew Ross Sorkin)
• The Craft Beer Bubble Has Burst (Axios)
• Why World Records Are Getting Harder to Beat (BBC)

Thank you for reading!

Please reply to this email with comments, questions, and/or feedback.

Stay wealthy,

Taylor Schulte, CFP®