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In a recent move anticipated by many, the Federal Reserve has begun a rate-cutting cycle, announcing a 50-basis-point reduction in the federal funds rate. This decision, although slightly larger than the expected 25-basis-point cut, is believed to be the first in a series of cuts set to take place over the upcoming years. The federal funds rate has now been adjusted to a range of 4.75% to 5%, with projections indicating a further decline to a range of 2.75% to 3% by the end of 2026. As interest rates are expected to decrease over the coming years, the impact on the S&P 500 and ETFs such as the Vanguard S&P 500 ETF (VOO -0.07%) remains a point of interest for many investors.

The performance of the S&P 500 and ETFs tracking the index following a Fed rate cut usually depends on the reason behind the rate adjustment. Research suggests that historically, stocks have not fared well after rate cuts made during recessions, with the S&P dropping significantly in the months following such actions. Conversely, when rate cuts are part of a normalization strategy, stocks have tended to perform positively, showcasing growth between 5% to 15% following the initial rate cut during these periods. Moreover, the most substantial gains have been observed when rate cuts are implemented after significant market downturns or panics, leading to significant market upswings shortly after the adjustments.

Considering the Fed's decision to cut rates in the absence of a financial panic, the debate now centers on whether the rate cuts are geared towards normalization or recession prevention. With Fed officials emphasizing a strong economic expansion tempered by slower job growth and slightly higher unemployment expectations, indications suggest that the rate-cutting cycle may signify a return to more standard monetary policy post previous inflation-control measures. Consequently, history implies that the S&P could potentially perform well over the next year as a result of this measure, with the possibility of money flowing into stocks as interest rates on alternative investments decline, potentially benefitting the Vanguard S&P 500 ETF.