J.P. Morgan: Where stocks go next after Fed rate cut

Investors have finally got their long-awaited rate cut after the US Federal Reserve officially cut US interest rates for the first time in 2025 overnight. 

In what was a close-to-unanimous decision, the Fed agreed to a 25 basis point cut, with one or two cuts likely to come this year, and a further two in 2026, according to J.P. Morgan.

Only the newly-appointed Stephen Miran broke ranks in voting for a 50 bps cut.  

It seems markets had well and truly priced it in. The S&P 500 rose 0.25% on the announcement, and was down 0.10% by the conclusion of Fed chair Jerome Powell's press conference.

So where do stocks go next? 

Kerry Craig, J.P. Morgan global market strategist, on a media call this morning, says there are two key things to note for equities investors.

One is simply that fiscal easing, and especially a weaker US dollar, help both US and global equities. 

"When you're in a rate cutting cycle, risk assets tend to perform quite well," as Craig put it.

More specifically however, he suggests a more active, bottom-up approach for equities investors given the dispersion in valuations between the top and bottom of the US stock market and others.

US earnings growth helps justify current valuations, said Craig, and US growth remained resilient.

This rate cut then becomes another reason for equities to grind higher and climb the "wall of worry", according to Craig. 

Consumer services and tech are the sectors J.P. Morgan still like, as are sectors that are part of the AI value chain, such as financials, utilities and industrials. Global diversification could also be a good idea, as capital flows from the US to other regions like Europe and Asia. 

But he suggests Powell put it best when he said "there's no risk-free paths right now."

We may not be at "irrational exuberance", as Alan Greenspan described the sentiment in 1996, and Craig stressed that a stock bubble was "not our characterisation of the market", but that doesn't mean investors should be complacent. 

There remains an upside risk to inflation, with J.P. Morgan predicting US inflation to be north of 3% by the end of 2025, slightly above the Fed's forecast.

US growth may stay under 2% and employment figures could remain weak.

One risk could be a selloff in big tech off the back of AI disappointment, but that could be short-lived given there remained a clear appetite for risk assets.

Further afield, Craig says the J.P. Morgan view is that the "dollar is overvalued", but it doesn't buy into the de-dollarisation narrative or see the US dollar losing reserve currency status anytime soon. 

On the threat to Fed independence, Craig was similarly unmoved. "Our view right now is the independence of the fed seems to be intact," he said. 

But overall the message for equities investors was fairly clear - the party can continue for a while longer at least. 

According to Craig, investors should be "thinking about mitigating some of that risk but not losing exposure to equities."

In other words: be alert, but not alarmed.