Another rate cut from the Federal Reserve is all but certain. Its impact on the stock market, however, is the topic of frantic debate.

In the bear camp are Bank of America Corp. and Morgan Stanley, whose strategists warned against relying too much on lower rates to boost stocks. In separate research, they reached the same conclusion after studying the historic relationship between Treasury yields and the S&P 500’s price-earnings ratios. That is, when rates go down too much, it hurts equity valuations.

Ned Davis Research, on the other hand, offered a brighter assessment by focusing on a favorable market pattern following the second rate cut of a cycle, as is the case now.

Getting it right has become an urgent matter for investors who have watched the S&P 500 rally 20% this year, with almost all the gains coming from an expansion in price multiples. Profits are barely growing, but stocks have rebounded from last year’s selloff after the Fed put a brake on rate hikes.

Rate cuts can clearly bolster stocks in some circumstances. When they don’t is when the economy is in trouble -- and easy monetary policy almost always comes at times of trouble. When yields undercut a certain threshold, Morgan Stanley and BofA pointed out, equity multiples tend to shrink.

“You can’t just depend on the Fed to lower interest rates to spur this bull market further,” Rich Weiss, chief investment officer of multi-asset strategies at American Century Investments in Mountain View, California, said by phone. “The fundamentals have to be there for additional highs on the stock market. They just aren’t there.”

BofA and Morgan Stanley found different yield levels that historically switched from being good to bad for valuations. Savita Subramanian at BofA pointed to 10-year Treasury yields below 4%, compared with the current level around 1.9%. Mark Cabana, the firm’s rate strategist, said in a note earlier this month that the market expects the Fed to lower interest rates about five times by early 2021 and the likelihood for zero or negative interest rates is rising.

“An ultra-low or negative rate environment is not necessarily supportive of stocks,” Subramanian wrote in a note last week. “The path to 0% would be accompanied by a significant deterioration in the growth outlook. That doesn’t bode well for P/E multiples.”

Look at Germany, she suggested. Yields on the country’s 10-year bund have slipped to minus 0.7% from 4.9% since 2010. And price-earnings multiples for the stock market have been flat, hovering near 13.

At Morgan Stanley, Mike Wilson examined real yields, the extra payment from 10-year Treasury above inflation. Currently, they sit in a range between minus 0.5% and zero, a place where further drops historically entail a decline in P/Es.

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