Dividend Futures Before and After Fed Delivers "Outsize" Rate Cut

On Wednesday, 18 September 2024, the U.S. Federal Reserve acted to cut the Federal Funds Rate for the first time since 2020. In doing so, the Fed took the unusual step of cutting this interest rate by a half-percent, which is double what Fed officials signaled they would do just one week earlier.

Clearly, Fed officials are seeing data about the state of the economy that has them spooked. But curiously, the stock market’s reaction to the Fed’s “outsized rate cut” was muted. The S&P 500 (Index: SPX) dropped a little under 0.3% to close out the day of trading at 5,618.26.

If we go back in time to last Friday, when the expectation the Fed would cut rates by a half percent instead of a quarter percent took hold, we find the S&P 500 is just 0.14% lower. For such an “outsize” rate cut, investors appear to have had very little reaction to it.

Because we’ve been taking monthly snapshots of the future expectations for the S&P 500′s quarterly dividends per share, we wondered what effect the rate cut announcement had on these dividend futures. The timing of the Fed’s announcement coincided with when we would take our September snapshot, so we took the opportunity of taking a before-and-after version. Here’s the chart capturing how the outlook for the S&P 500′s dividends per share changed in response to the news of what was potentially the biggest market-moving news event of the week:

Like the muted reaction in stock prices, the change in the outlook for the S&P 500′s future quarterly dividends per share was either flat to slightly negative in each quarter from the current 2024-Q3 through the distant future quarter of 2025-Q3.

All that means is the Fed’s action wasn’t much of a surprise for the market. It had already been baked in by investors paying attention to the same economic data as the Fed. Consequently, the news of the rate cut had little more than a very transitory effect that all but dissipated in the two hours that elapsed between the Fed’s announcement and the close of the day’s trading.

More About Dividend Futures Data

For this series, we have been taking a snapshot of the CME Group’s S&P 500 quarterly dividend futures data shortly after the second or third week of each month.

Dividend futures indicate the amount of dividends per share to be paid out over the period covered by each quarter’s dividend futures contracts, which start on the day after the preceding quarter’s dividend futures contracts expire and end on the third Friday of the month ending the indicated quarter. So for example, as determined by dividend futures contracts, the now “current” quarter of 2024-Q3 began on Saturday, 22 June 2024 and will end on Friday, 20 September 2024.

That makes these figures different from the quarterly dividends per share figures reported by Standard and Poor. S&P reports the amount of dividends per share paid out during regular calendar quarters after the end of each quarter. This term mismatch accounts for the differences in dividends reported by both sources, with the biggest differences between the two typically seen in the first and fourth quarters of each year.

Image Credit: Microsoft Copilot Designer. Prompt: “A crystal ball with the word ‘SP 500′ written inside it”. And ‘Dividends’ written above it, which we added.