As the Federal Reserve joins the rate cut party, global growth may begin to see the boost investors have been waiting for.

The Federal Reserve may be gearing up for its first interest-rate cut of the cycle, but the European Central Bank, the Bank of Canada, Bank of England, among other advanced economy central banks have already begun to reduce rates. In fact, just over half of the world's central banks in advanced economies as defined by the International Monetary Fund have already started to cut rates. An index of central-bank rate cuts that measures the net number of advanced central banks changing rates leads the global manufacturing Purchasing Managers' Index (PMI) by about nine months, as you can see in the chart below. The arrow points to the most likely shift to cuts by nearly all of the 18 advanced central banks over the coming months as the United States, Australia, Norway, South Korea and a few others are likely to join the 11 who have already cut rates.

Historically, the manufacturing PMI has been a good proxy for global growth for both output and corporate earnings. Manufacturing tends to be more cyclical, and therefore leads changes in the overall economy. If history unfolds similarly, rate cuts could help to lift economic growth as represented by the global manufacturing PMI from around 50 to near 55 by mid-2025. Let's examine what it might mean for stocks and stock market leadership.

When the global manufacturing PMI is above 50 and rising, as the chart above suggests it may be in the coming months, stocks have posted the strongest average monthly returns. The average monthly total return of the MSCI World Index has been 1.4% (18% when annualized) during similar periods. When the PMI was below 50 and rising the monthly return averaged 0.8% (10% annualized) and the stock market was effectively flat on average when the PMI was falling.

When the global manufacturing PMI is above 50 and rising, international stocks have posted stronger average monthly returns than U.S. stocks. Unsurprisingly, when the PMI is above 50 international stocks have outperformed U.S. stocks whether the PMI was rising or falling and international stocks underperformed when the PMI was below 50, especially when it was falling, as you can see in the chart below. The makeup of the U.S. stock market has tended to be less economically sensitive than the market of non-U.S. stocks. The MSCI EAFE Index of developed international stocks has much higher weightings in economically sensitive sectors like Financials, Energy, and Materials. Should the PMI rise from around 50 over the coming months as suggested by the historical relationship with central bank rate cuts, international stocks may lead the market.

If the slower start to rate cuts by the Fed results in the U.S. manufacturing PMI rebounding from just below 50 more slowly than the non-U.S. PMI, then the dollar may slide relative to currencies like the euro and the pound. As the chart below shows, when the U.S. manufacturing PMI lags the rest of the world, the dollar tends to fall—as it has recently. This could act as another factor favoring non-U.S. stock market exposure in the months ahead.

International stocks have outperformed U.S. stocks so far during the third quarter. Should the global economy respond as it has in the past to global rate cuts, the historical lag between monetary policy stimulus and growth suggests a brighter outlook over the coming months and the potential for solid stock market returns and continued international stock market leadership.

Michelle Gibley, CFA^®, Director of International Research, and Heather O'Leary, Senior Global Investment Research Analyst, contributed to this report.