Schroder: Which US stocks perform best during a rate-cutting cycle?

According to the Wisdom Financial APP, Schroder stated that based on the expectation that the U.S. economy will not fall into a recession and the Federal Reserve may cut interest rates in September 2024, momentum stocks, growth stocks, and quality stocks will outperform the overall market. At the same time, defensive sector stocks may also perform strongly in a rate-cutting environment compared to cyclical sector stocks. After the first rate cut by the Federal Reserve, defensive sector stocks tend to outperform cyclical sector stocks. This trend is particularly evident during economic recessions, possibly because investors seek to invest in sectors that are most likely to withstand weak economic growth and benefit from more aggressive rate-cutting policies. Historically, when the U.S. inflation rate approaches the Fed's target of 2%, momentum investment strategies and technology stocks tend to perform well.

On the other hand, most cyclical sector stocks tend to underperform in the first three months after the first rate cut, especially if the rate cut occurs during a U.S. economic recession. However, one year after the start of a loose monetary policy cycle, cyclical sector stocks usually provide strong returns. Initially, cyclical stocks may be sold off due to weak economic growth and easing inflation pressures, but as the valuations of these stocks become more attractive and investors expect rate cuts to boost economic activity and corporate profits, these sector stocks become more appealing. However, the financial and non-essential consumer goods sectors are exceptions, as they generally perform well even in the first few months after the first rate cut.

It is worth noting that in the first few months after a rate cut, the technology sector generally underperforms the overall market. During a rate-cutting cycle, quality stocks and growth stocks typically see gains, albeit slightly lower than cyclical stocks. Cyclical sector stocks such as technology tend to perform well in rising financial markets but also experience larger declines in falling markets. During a loose monetary policy cycle initiated by the Fed during an economic recession, the performance of growth stocks, quality stocks, and momentum stocks is less impressive. This may be because investors tend to favor defensive sector stocks in the financial market, such as low-volatility stocks