The sector winners and losers of interest rate cuts
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Interest rate cuts could be coming as soon as September, even as inflation is percolating.
Why it matters: A combination of lower rates and inflation could be rocket fuel for cyclical corners of the stock market.
Catch up quick: Federal Reserve chair Jerome Powell opened the door to a September rate cut at his Jackson Hole speech, but he did not promise one.
- Some strategists warn a rate cut next month is too soon, as inflationary pressures continue and the labor market is on the cusp of a rebound.
- According to this macro view, the central bank risks cutting into a reacceleration of the economy by moving down rates too soon.
- Cutting rates into an reacceleration could supercharge cyclical parts of the market, sectors that boom amid growth cycles and sink amid slowdowns.
What they're saying: If rate cuts are delivered as the economy is potentially reaccelerating, "that's like a perfect storm" for cyclical corners of the market, Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America, tells Axios.
Zoom in: Bank of America is overweight energy, financials and consumer discretionary, sectors "lightly held by active investors," Subramanian says.
- But these sectors are "relatively cheap" right now, especially in a market where the biggest stocks, tied to AI, keep getting more expensive.
Here's the bull case for pro-cyclical stocks, as Subramanian sees it:
- These sectors of the market benefit from inflation.
- They see sales growth trend higher amid economic acceleration.
- They are heavily regulated, which could change under President Trump.
Between the lines: Riskier corners of the market are in more defensive areas like consumer staples and health care.
- These sectors can be hurt more by inflation than the some of the more discretionary corners of the market.
- These sectors are tied to lower-income consumers, who can struggle to continue spending if inflation ticks up.
Zoom out: Investors didn't just bet on sector winners after Powell's somewhat dovish speech on Friday.
- The Russell 2000, made of more rate sensitive smaller firms, rallied 3.9%.
- Subramanian cautions that she would stick to mid and large caps until there's even more clarity about the Fed's path forward.
- Cash is "probably the worst investment" if inflation is sticky since it essentially sits while prices rise, eroding buying power.
What we're watching: The bond market.
- Bonds rallied alongside stocks Friday.
- This points to the broader challenge of diversification in a market where asset classes like stocks and bonds are moving in synchronicity.
