Traders are capitalizing on the Fed's bold rate cut—here's how

US stocks soared on Thursday as optimism grew that the Federal Reserve's significant interest-rate cut will lead to a "soft landing" for the US economy.

The S&P 500 (^GSPC) climbed roughly 1.7%, while the Dow Jones Industrial Average (^DJI) rose more than 500 points, both touching fresh record highs. The tech-heavy Nasdaq Composite (^IXIC) led the gains, up 2.2%.

Investors are rallying as they assess the Fed's decision to initiate its new rate cycle with a 50 basis point cut. Following Wednesday's policy announcement, markets fluctuated before closing lower, but enthusiasm has since surged.

Wall Street has embraced Chair Jerome Powell's message that a substantial cut in a relatively strong economy can fend off the risk of recession. This move is seen as a sign of confidence rather than panic about current conditions.

Bank of America now believes the Fed will proceed to cut rates by 0.75% by the end of the year, versus the 0.50% it previously forecast. In comparison, the central bank's own "dot plot" indicates policymakers expect a half-percentage-point reduction.

Rate-sensitive growth stocks climbed in premarket trading, with big tech megacaps that have fueled this year's rally making significant gains. Alphabet (GOOG), Microsoft (MSFT), Meta (META), and Apple (AAPL) each rose roughly 2%, while Tesla (TSLA) and Nvidia (NVDA) increased around 3%.

With the Fed's pivot complete, market participants have returned to watching data releases as they brace for potential volatility. A weekly Labor Department report on initial jobless claims released Thursday morning showed a fall to the lowest level in four months. Claims for the week ended September 19 came in at 219,000, while the prior week's total was revised 1,000 higher to 231,000.

Dow and S&P 500 reach record highs as stocks soar on rate cut

The Dow and the S&P 500 touched record highs on Thursday as investors digested the Federal Reserve's announcement of a 50 basis point rate cut during the prior session.

The S&P 500 (^GSPC) climbed roughly 1.7%, while the Dow Jones Industrial Average (^DJI) rose more than 1%, both reaching record highs. The Nasdaq Composite (^IXIC) led the gains, up more than 2.3%.

Major averages seesawed during the prior session following the Fed's decision to cut rates but have since stabilized with upward momentum.

Gold hovered near all-time highs as the precious metal and other commodities climbed amid a declining dollar.

Conclusion

Traders can capitalize on the current market momentum driven by the Fed's aggressive rate cut. With interest rates lower, growth stocks—particularly in the tech sector—are gaining traction. It's an opportune time to reassess portfolios, focusing on rate-sensitive assets that stand to benefit from the new monetary policy direction. Staying vigilant on economic data releases and market trends will be crucial in navigating potential volatility and making informed investment decisions.

This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.

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Author:

Paul Reid

Paul Reid is a financial journalist dedicated to uncovering hidden fundamental connections that can give traders an advantage. Focusing primarily on the stock market, Paul's instincts for identifying major company shifts is well established from following the financial markets for over a decade.