Barclays: Don't go against the Federal Reserve, the opportunity for cyclical stocks has arrived!

The Federal Reserve cut interest rates by 50 basis points, triggering a global market explosion this week. With the exception of US bonds, almost all assets saw significant gains. Barclays believes that the substantial rate cut will help the US economy achieve a soft landing. In this scenario, investors should not go against the Federal Reserve and should avoid shorting cyclical stocks.

In a report released on Friday, Barclays' analyst team led by Emmanuel Cau wrote:

It is now clear that the Federal Reserve has shifted to growth protection mode. Time will tell, but with upcoming data remaining stable, the possibility of a soft landing still exists.

The report points out that the Federal Reserve's 50 basis point rate cut to support economic growth is an unexpected move that demonstrates its commitment to achieving a soft landing. The market has responded positively to this policy adjustment, with prices of risk assets rising and the yield curve steepening, indicating investor alignment with the Federal Reserve's objectives.

However, despite market expectations of more rate cuts in the future, current pricing appears overly optimistic compared to the Federal Reserve's expectations. Barclays believes that if the upcoming data supports a soft landing for the US economy, the Federal Reserve may not cut rates as aggressively as the market expects.

Barclays states that without catalysts challenging a soft landing, US stocks, especially cyclical stocks, face the least resistance to upward movement. Historical experience suggests that as long as a recession does not follow the Federal Reserve's rate cut cycle, these assets typically rebound steadily.

Despite unfavorable factors such as slowing Asian growth and US election uncertainty, recent positive surprises in the US and EU economies, along with the steepening of the yield curve, provide additional fundamental support for cyclical stocks.

Cyclical stocks were previously oversold and undervalued fundamentally, making their valuations still attractive to investors. Historically, the fourth quarter is usually the best performing period for US stocks, with cyclical stocks often outperforming defensive stocks. Additionally, due to the defensive positioning of the stock market since the summer, the rebound of cyclical stocks may surprise many investors.

Barclays concludes by stating that with the long-awaited first rate cut by the Federal Reserve now in the past, the market should refocus on fundamentals. The September PMI data to be released next week, as well as the upcoming third-quarter earnings season, will provide more clues about the short-term trend of the US economy. The institution wrote:

We note that the recent earnings per share (EPS) revisions have turned negative again, but the decline exceeds the extent implied by the PMI. In our recent discussions with clients about the Federal Reserve meeting, it seems that most are not eager to increase exposure to cyclical stocks, as the upcoming third-quarter earnings season is seen as a potential source of downside risk

On the other hand, if the PMI stabilizes and a broader range of activities continue to rebound surprisingly, investors may decide to overlook the recent risks of returns. Especially since market expectations for third-quarter earnings have generally decreased since the summer, reducing the threshold that investors need to overcome.