What will a likely US rate cut mean for Australian shares?

The next meeting of the US Federal Reserve is on the cards this week, and all eyes are on whether rates will be cut to spur on the US economy.

The research team at Wilsons Advisory say the market is pricing in an 89% chance that US rates will go lower, which has implications for the share markets in the US and in Australia.

As they said in a note to clients this week:

While there are no absolute certainties in central bank crystal ball gazing, it would appear a cut from the Fed is highly likely. Incremental evidence of ongoing labour market softness, a relatively modest inflation uplift from tariffs, alongside some relatively dovish comments from key Fed board members are adding to market confidence that the Fed is set to cut.

Implications for the stock market

So what does this mean for stocks here and in the US?

The Wilsons research team says a further rate cut should be supportive for stock prices both in the US and in Australia.

Looking at the empirical relationship between Fed easing cycles and equity market performance shows the US equity market has had a strong tendency to rise when backed by the supportive combination of Fed easing and an economic soft landing. Indeed, we find no instances (since 1980) of poor US market performance when the Fed is in easing mode, and the US economy achieves a 'soft landing'. This keeps us constructive on US equities despite full valuations and lingering concerns around the AI capex boom.

And there is also a correlation between Australian equities rising when the Fed is easing and the US economy continuing to grow, Wilsons says.

This appears to hold regardless of whether the RBA is easing in sync with the Fed or not. This is comforting in the face of rising uncertainty as to whether the RBA's next move in domestic rates in 2026 is actually up rather than down.

Australian sentiment changing

As far as the next moves from the Reserve Bank of Australia on rates, Wilsons says the market is now pricing in a move higher "in the back end of 2026''.

This is in contrast to the market pricing for two cuts in 2026 a little over six weeks ago.

Wilsons said Australia inflation has been a "big surprise" in recent months.

This has caused expectations for the cash rate to move from two cuts in 2026 to the market now pricing for a likely hike. This swing in rate expectations played a part in the recent 7% correction in the Australian equity market however renewed expectations for lower US interest rates have helped the local market edge up from its recent lows.

The post What will a likely US rate cut mean for Australian shares? appeared first on The Motley Fool Australia.

Motley Fool contributor Cameron England has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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