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Stock Market – What matters now as the Fed begins cutting rates?

• The U.S. labor market is cooling down compared to the pre-pandemic period. Inflation is decreasing, but the unemployment rate is rising, though it has not yet surpassed the full employment threshold. This provides a basis for the U.S. Federal Reserve (FED) to implement moderate interest rate cuts, facilitating a soft landing for the economy. Global investors are eagerly awaiting the FED's interest rate meeting, with hopes for the first rate cut in four years. The market is focused on the potential reduction, which could be 25 or 50 basis points (bps), with 25 bps currently being the base scenario.
• Throughout history, when the Federal Reserve (FED) has cut interest rates, the U.S. stock market has responded differently depending on the severity of recessions and financial crises. Currently, the market is anticipating a "soft landing" scenario for the U.S. economy. Under this scenario, we expect the U.S. stock market to react positively following the FED's decision to lower interest rates.
• The Federal Reserve's decision to cut interest rates could have a positive impact on global financial markets, including Vietnam, in a scenario where the U.S. economy cools down without entering a recession. The correlation between the VN Index and the S&P 500 stands at a positive 0.6. Therefore, if the FED reduces interest rates and the U.S. economy achieves a soft landing, the Vietnamese stock market may indirectly benefit from international capital flows shifting towards higher-risk and higher-expected-return assets over the next 12 months.