The Federal Reserve last week cut interest rates from 4.25–4.50 percent to 4.00–4.25 percent and will lower rates further at the remaining meetings of the FOMC, the Fed’s policy body. This comes even as financial conditions have already improved and there is still an extraordinary amount of liquidity on the sidelines.
An interest rate cut makes money cheaper. Companies can borrow more easily. Investors go in search of higher returns than savings accounts provide. This extra money often flows into the stock market.
The circumstances are therefore highly favorable for riskier investments. Banks have plenty of money to lend. Large investors have billions of euro ready. If they start investing that capital, stock prices can rise sharply. With falling rates, government bonds become less attractive. Savers in the US recently received more than 5 percent, but after the policy rate adjustment that yield is heading toward 3 percent. The stock market offers higher returns, so many savers will take that step. After all, greed is a stronger emotion than fear.
Tech giants benefit first
The Magnificent Eight—the existing seven companies plus Oracle—continue to perform well. These firms combine strong profits with growth opportunities. With falling rates they become even more attractive, because their future profits are worth more. Since Fed chair Powell hinted at rate cuts in August, these stocks have risen faster than the rest of the market. They form a kind of safe haven within growth stocks because they actually generate profits, unlike many other tech companies.
Biotechnology is also experiencing a revival. These companies are often loss-making but have significant potential. They do, however, need to return to the market regularly for additional funding. With improved financial conditions, these promises of the future become easier to realize. Moreover, biotech companies can benefit from artificial intelligence in drug development.
Other companies without profits but with big ambitions also perform well in low-rate environments. Their value depends on expected future earnings. Lower rates make those expectations more valuable. Young tech companies, Cathie Wood’s ARK Innovation fund and cryptocurrencies like Bitcoin are benefiting. The ARK Innovation fund became the symbol of the previous growth bubble in 2021 and is now making a remarkable comeback. This fund bundles exactly those loss-making, disruptive firms that benefit most from falling rates.
A clear sign of renewed risk appetite can be seen in the IPO market. In 2025 already 156 new companies have gone public in the US, the highest number since 2021. In the first quarter, 7.9 billion dollar in fresh capital was raised. Even more remarkable are the sharp price gains of these new listings. On average, they rise 20 percent on their first trading day. Large IPOs even gained more than 40 percent. This is a big contrast with 2022–2023, when new stocks often dropped after their debut. These large first-day gains show a market where investors are willing to pay up for growth and potential.
Warning signs piling up
When the riskiest assets rise the fastest, that is often a warning signal. It suggests greed is becoming more important than caution. Bitcoin is surging, loss-making tech firms are jumping, and retail investors are clearly showing signs of Fomo, the fear of missing out.
Financial history shows that bubbles often inflate when rates are low and money is abundant. The dotcom bubble around 2000 and the housing bubble before 2008 both started this way. In 2021 we saw a similar situation with meme stocks and so-called SPACs, blank-check companies that acquired firms.
Just like in the dotcom rally, the gap between the new economy and the old economy is widening quickly. Yet there is a difference. The new economy companies may belong to the select group enabling artificial intelligence, but likely the old economy firms (preferably with large workforces) will optimally benefit from it. Banks and homebuilders traditionally do well when rates fall. They gain from more credit demand and lower financing costs. These early-cyclical sectors provide useful diversification compared to tech stocks. Even undervalued healthcare and energy shares can provide protection in turbulent times.
It is important to realize that financial bubbles rarely develop in straight lines. Sharp corrections that are quickly erased are typical of mania phases. They reinforce the buy-the-dip mentality among investors, where every decline is seen as a buying opportunity. This volatility demands discipline. It is tempting to go all-in on the rising trend, but history shows this can be dangerous when sentiment suddenly shifts.
Conclusion
With the Federal Reserve rate cut, a new chapter for the stock market has begun. The conditions for significant price increases are present: ample liquidity, low interest rates and renewed risk appetite. Tech and biotech offer growth potential, but the exploding IPO market also shows signs of exaggeration.
For investors this brings opportunities, but it also requires discipline. Bubbles always burst eventually. The art is to benefit from the rise without being trapped when the music stops. Diversification therefore remains important for risk management, especially as volatility increases during bubble phases. The recent rate cut is thus not only good news for investors. It is also a signal to stay alert to market developments and not throw caution overboard.
Han Dieperink is chief investment officer at Auréus Vermogensbeheer. He was previously chief investment officer at Rabobank and Schretlen & Co.