Fed rate cuts: What this means for tech stocks and AI boom

Despite the impact of the Santos takeover being withdrawn, US rate cuts are likely to push the ASX higher.

The resumption of US interest rate cuts this week may have set the stage for a powerful rally in technology and artificial intelligence stocks, echoing the heady days of the late-1990s tech boom.

Despite initial market jitters and sticky inflation concerns, US Federal Reserve chair Jerome Powell struck the right tone with a cautious approach to rate cuts in a “stagflation-lite” economy, even as many committee members proved far less aggressive than markets had hoped.

Australian stocks initially tumbled after Abu Dhabi’s XRG Consortium withdrew its $30bn takeover of Santos but found support as US stock index futures signalled record highs on Wall Street.

“We think a resumption of Fed cuts will continue to favour stocks over bonds, cyclicals over defensives and growth over value,” said Macquarie equity strategist Matt Brooks, who drew striking parallels between today’s market and the 1998 tech surge.

Brooks argues this easing cycle differs fundamentally from typical recession-driven cuts.

The Fed is pumping liquidity into markets while US economic growth is already running at a healthy clip of about 3.3 per cent, creating a powerful backdrop for risk assets.

“This means stocks over bonds, cyclicals over defensives and growth over value,” Brooks said.

Technology and AI-related sectors are posting some of the strongest gains, while traditional defensive plays like healthcare and consumer staples lag.

The Fed’s decision, while widely expected, came with important caveats.

Powell called it a “risk management” cut and said there “wasn’t widespread support at all” for a larger 50 basis point reduction. Donald Trump’s new FOMC appointee and White House economic adviser Stephen Miran clearly wanted back-to-back 50 basis points rate cuts in September, October and November, but there was less dissent than expected at the September meeting.

Traders work on the floor of the New York Stock Exchange during morning trading this week. Rate cuts have pushed Wall Street to records. Picture: Michael M. Santiago/Getty Images

But, the central bank shifted its focus squarely onto labour market weakness, no longer describing employment conditions as “solid”. This underlined the dovish pivot Powell made at Jackson Hole and supports further easing, even as inflation remains stubbornly above the two per cent target.

“The risks were clearly tilted toward inflation, I would say they’re moving toward equality,” Powell said to justify the Fed’s triage of nascent labour market weakness over still-elevated prices.

Market reaction proved telling. After initial dovish enthusiasm, yields rose and the dollar strengthened as investors digested the Fed’s cautious approach to future cuts. Bloomberg noted it was the seventh straight time the dollar rose on a Fed day, the longest winning streak since 2001.

Yet beneath the surface, powerful structural forces are driving equity markets higher. JP Morgan’s Nikolaos Panigirtzoglou points to record-high equity allocations by US households, now at 45.4 per cent of total financial assets, surpassing even the dotcom bubble peak.

“This co-movement between the PE multiple of the US equity market and the equity allocation of the US household sector implies that the higher the appetite by US households to hold equities in their portfolios, the more expensive the equity market becomes,” he noted.

While US households appear overextended, global equity positioning remains well below 2000 peaks. Panigirtzoglou calculates that if global equity allocations return to dotcom era levels over three years, stock prices could rise 47 per cent from current levels.

This “new equity culture” reflects structural changes including zero-commission trading, pandemic-driven retail participation and greater options usage. These shifts suggest higher equity valuations may be here to stay.

For Australian investors, the implications are profound.

Macquarie’s Brooks highlights local tech plays NextDC and Seek for AI exposure. He also sees US-exposed cyclicals Lovisa, Webjet, Flight Centre and Credit Corp benefiting from US rate cuts.

The seasonal backdrop remains challenging as September and October are historically weak for stocks. GSFM’s Stephen Miller warns of “certain uncertainty” in the year ahead, particularly as President Trump seeks greater influence over Fed decision-making.

The key risk remains inflation, especially with tariff pressures building. Core consumer prices could reach 3.4 per cent by December, making “a full-blown easing cycle more difficult but not impossible,” warns RBC economist Michael Reid.

For now, though, Powell’s dovish tone has given markets what they needed.

Australian stocks look set to benefit from the spillover effects, particularly if the Fed continues prioritising labour market concerns over inflation fears.

The late-1990s parallel isn’t perfect, but it’s compelling. With US growth solid and liquidity flowing, tech stocks could be poised for another powerful run.