Wall Street grows more upbeat about rate cuts
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An unexpected cooling in the delayed inflation data out on Thursday has investors hopeful that the Federal Reserve could cut interest rates deeper than previously expected next year.
Why it matters: More interest rate cuts would be bullish for stocks and could broaden the gains beyond Big Tech, as long as the economy keeps growing.
What they're saying: If the Federal Reserve eases more than expected, then "upside is going to be even higher for the S&P 500, surpassing 8,000 in 2026," JPMorgan equity strategist Dubravko Lakos-Bujas said on an outlook call.
- The S&P 500 is now around 6,775, so that would translate to an 18% gain.
- Fed easing could drive a broadening of leadership in stocks beyond just the Big Tech names, JPMorgan cross-asset strategist Fabio Bassi said.
Zoom in: These sectors could benefit from larger-than-expected rate cuts:
- Cyclical stocks tied to the strength of consumers, if consumers feel like they can spend. Those may include retailers, autos, travel and potentially home builders, Keith Lerner, chief investment officer at Truist, tells Axios.
- Small cap stocks could also rally, since smaller companies are more likely to carry more debt as they work to grow their business. Financials could also catch a bid if lending picks up amid looser financial conditions.
State of play: The winners and losers will depend on why rates go lower.
- If the Fed cuts into a sticky inflationary backdrop, consumer spending could remain pressured, according to Lerner, which may keep market gains concentrated in the current leader: technology.
Reality check: Tech stocks are responsible for almost half of the S&P 500 based on market cap. These stocks are not going to be deeply affected by interest rates, Lerner notes.
- Instead, earnings growth will be the primary driver for Big Tech, he says.
The bottom line: If the Fed cuts in a good economy, the market may rally and leadership could broaden into sectors tied more closely to economic cycles.
- But if rates come down and inflation remains sticky or cracks in the labor market widen, investors may keep relying on tech to do the heavy lifting.
