Interest rates can do something unprecedented in 2020. A big move in the stock market usually follows.

Federal Reserve officials will meet on September 17 and 18 to review economic data and adjust monetary policy as needed. The market expects the committee to cut the benchmark federal funds rate for the first time since 2020, setting in motion a sequence of events that will lower other interest rates and encourage economic growth.

Policymakers will most likely start with a cut of a quarter of a percentage point. However, inflation hit a three-year low in August and unemployment hit a three-year high in July, leaving room for more rate cuts. Indeed, futures prices imply a 15% chance of a half-percentage-point cut at the September meeting.

Historically, rate cuts have been a positive catalyst for S&P 500 (^GSPC 0.54%)an index widely regarded as the best barometer for the US stock market. Here’s what investors should know.

History says the S&P 500 could rise when the Federal Reserve cuts interest rates

Since 1984, the Federal Reserve has steered the economy through 11 easing cycles — that is, 11 periods when interest rates fell. In most cases, the S&P 500 produced a positive return in the 12 months following the first rate cut in each cycle, as shown in the chart below.

Data source: Trading Economics.

As shown above, over the past four decades, the S&P 500 has returned an average of 14% during the 12 months since the first rate cut in a bearish cycle.

Interestingly, if performance is analyzed based on the size of the first rate cut, the S&P 500’s 12-month average return was 16% during easing cycles that began with a quarter-point cut. By comparison, his average 12-month return was 13% during lean cycles that started with a half-point reduction.

In addition, recessions have played a key role in determining the performance of the S&P 500. Over the last three cycles, the US economy experienced a recession within a year of the first interest rate cut, and those events corresponded to a median decline of 12 months of 14% in the S&P 500. But no recession has occurred within a year of the other eight cycles, and those events corresponded to an average 12-month gain of 18%.

In short, history says the S&P 500 could rise if the Federal Reserve cuts rates in September, provided the economy avoids a recession. But there are two big asterisks next to that statement. First, no stock market indicator is perfect. Second, the performance of the S&P 500 in the coming months depends on company-wide financial results and ratings.

Wall Street is forecasting a 13% rise in the S&P 500 over the next year

S&P 500 companies reported 11.3% earnings growth in the second quarter of 2024. That’s the fastest growth rate since the fourth quarter of 2021, according to data FactSet Research. Better yet, Wall Street analysts expect full-year earnings to grow 10.1% in 2024 and then accelerate to 15.4% in 2025. That would be the fastest annual earnings growth rate since 2018 .

However, the high valuations suggest that these estimates have already been fed into the market. The S&P 500 currently trades at 20.6 times forward earnings, a premium to the five-year average of 19.4 times forward earnings and the 10-year average of 18 times forward earnings. “Momentum has been the driving force in the US market and the characteristics of the best momentum stocks have become increasingly riskier,” according to Paul Quinsee at JPMorgan Chase.

Even so, Wall Street analysts generally expect the S&P 500 to maintain its momentum in the year ahead. The index has a bottom-up target — which is calculated by aggregating the estimated median price target for each stock in the index — of 6,275, implying a 13% upside from the current level of 5,555 over the next 12 months.

Investors should keep in mind that past performance is never a guarantee of future results, and forecasts such as price targets and earnings estimates are inherently uncertain. Warren Buffett once wrote, “Short-term market predictions are poisonous and should be kept locked away in a safe place away from children and also from adults who act like children in the market.”

That said, I think patient investors can put money into the stock market today, provided they follow a few simple rules: (1) Never buy a stock if you don’t understand the business, (2) never buy a stock you don’t own a comfortable stock for three to five years, and (3) never buy a stock without considering its valuation.

To be clear, this does not mean that the S&P 500 will continue to rise in the coming months. The index will almost certainly fall if the economy slips into a recession. However, dips are a great time to buy good stocks, so investors should focus on any market weakness. To quote JPMorgan’s Mary Park Durham, “Investors should view pullbacks as an opportunity to exit cash and ensure adequate diversification.”