The Federal Reserve sharply cut interest rates by 50 basis points. Is this bearish or bullish?

1. Why such a significant rate cut? The U.S. previously conducted expectation guidance, revising the non-farm payroll employment numbers for June and July. After the revision, the combined employment growth for June and July was 86,000 lower than before. Simply put, increasing economic downturn pressures led to expectations of a rate cut, and the market became convinced of a 50-basis-point cut from this point onward.

2. The economic fundamentals are not optimistic, and the Fed couldn’t even wait until after the election to cut rates. The Fed’s core KPI is to boost employment through rate adjustments.

3. How will U.S. stocks perform? Before the Fed’s rate cut, the 10-year Treasury yield had fallen to around 3.6%. If rate cuts continue this year, Treasury yields will decline further, the dollar will weaken broadly, and the interest rate gap between U.S. bonds and non-U.S. economies will narrow, leading to capital gradually flowing out of the U.S.

4. As a result, U.S. stocks face deteriorating fundamentals, with GDPNow just revising down Q3 expectations, and capital outflows. The pressure on U.S. stocks is evident.

5. Some may argue that rate cuts mean eased liquidity, and since interest rates are the anchor for capital pricing, this should be bullish. While this holds true in the long term, in the short term, a sharp rate cut will first trigger a reallocation of international capital, easing pressure on non-U.S. economies to some extent.