Stock market melt-up is being fueled by blind belief in lots of rate cuts in 2026

Yahoo

06-07-2025

To this day, I get surprised by the storylines that develop in markets.
Color me surprised by how quickly markets rebounded after the "Liberation Day" massacre. Tariffs? Who cares? More Nvidia (NVDA) stock, please!
Also add me to the surprised column for how fast markets bounced off the March 2009 Great Recession lows. I vividly remember staring at god-awful economic data for much of 2009 ... and a rallying market.
I return today with the latest head-scratching (though smile-inducing) narrative developing among investors: 2026 is going to be a MONSTER year for interest rate cuts, so buy stocks hand over fist today! You didn't read that wrong, friends.
There are five months left in 2025 — months that will include earnings periods, tariff deadlines, a tax bill deadline, and no doubt a host of negative surprises — yet investors are already keyed in on 2026.
I kid you not, and I credit Morgan Stanley for bringing this developing narrative to the surface this past week, as I have been hearing chirpings of it for weeks.
Inside the latest stock market melt-up
Morgan Stanley said its economics team sees seven rate cuts in 2026, a "dynamic that's likely to be a second half tailwind for back-end rates and valuation."
Mike Wilson, the team's closely followed chief investment strategist, noted that "there are already signs the equity market is starting to price this now."
Wilson continued, "Our work shows equity performance is strong during Fed cutting cycles even if this tailwind starts to get discounted ahead of time."
Keep in mind that everything we've heard from Fed Chair Jerome Powell in recent weeks suggests that a rate cut later this month or September is far from guaranteed. June's strong jobs report further muddles the picture.
Yet, back up the truck on seven rate cuts for 2026.
Read more: How the Fed rate decision affects your bank accounts, loans, credit cards, and investments
I must tip my cap to veteran Charles Schwab strategist Liz Ann Sonders for pushing back on this view.
"So I have a bit of a contrarian take on that [rate cut view]. I think part of the reason, if you wanted to point to fundamental reasons why the market has done as well as it has, is actually because the Fed is not cutting interest rates. And that's because the background conditions as it relates to their dual mandate is not suggestive of the Fed needing to move to easier policy," Sonders told me on Yahoo Finance's Opening Bid (video above).
Sonders added, "You also have to remember that a scenario under which the Fed is cutting, say, seven times in 2026, would be a backdrop of not much inflation tied to tariffs or otherwise, but probably significant weakening in the labor market. So it's sort of a be careful what you wish for."
Here's your summer 2025 investing guide
In other words, be careful in clamoring for a barrage of rate cuts in 2026 at this juncture, and stay locked in on the fundamentals of the companies you own.
Here's what other investing pros are telling me on Yahoo Finance's Opening Bid about the rate outlook in 2026.
"Our perspective is that the Jackson Hole meetings coming up in August, Jerome Powell will signal to the Street that they're going to reduce rates in the back half of this year. That will be a net positive. Then you'll get another chairman or chairwoman that will be coming in 2026. That one will be more dovish than Jerome Powell that will signal to the market for additional cuts. Maybe you get two or three more cuts of a quarter of a percent in 2026."
"It wouldn't surprise me if rates aren't cut this year. On the other hand, maybe they will do 25 basis points or even 50. Just not big changes either way. And then next year, I think that there will be some cuts. A lot of it swings on what kind of impact the tariffs have, and not just the tariffs, but the uncertainty it creates."
"At some point in the second half, we expect the Fed to cut rates. So I think all that means is the market does move higher. But there will certainly be some gut checks along the way, in our view. And the one constraint from here, even though the technical picture is very strong, is that the valuations of the market are now back to 22 multiple, which is the high end of the range that we've seen in the last few years."
Brian Sozzi is Yahoo Finance's Executive Editor and a member of Yahoo Finance's editorial leadership team. Follow Sozzi on X @BrianSozzi, Instagram, and LinkedIn. Tips on stories? Email [e-mail].