The Fed's "Hawkish Cut" and the Great Rotation: Why Growth Stocks Are Losing Ground to Value

The U.S. stock market's shift from growth to value stocks in 2025 has been one of the most striking developments in recent years, driven by a confluence of macroeconomic forces. At the heart of this rotation lies the Federal Reserve's tightening cycle, fiscal-driven inflation, and the enduring influence of the TACO trade framework. As investors recalibrate their portfolios, sectors like financials, energy, and defensive consumer goods have gained traction, while high-duration tech stocks face headwinds. This strategic reallocation reflects a broader recalibration of risk tolerance and return expectations in a world where policy uncertainty and inflationary pressures dominate.

The Fed's Tighter Terminal Rate and the "Hawkish Cut"

The Federal Reserve's terminal rate in 2025, projected at 3.4% by the December 2025 SEP, has become a linchpin for investor behavior. Despite the Fed's December 2025 rate cut-a move described as a "hawkish cut" due to its conditional nature-markets interpreted the decision as a signal of prolonged tightness. This ambiguity, compounded by a government shutdown, that obscured key economic data, created a "data fog" that eroded confidence in growth narratives.

J.P. Morgan Global Research underscores this dynamic, noting that the Fed's cautious approach-anticipating two more 2025 rate cuts and one in 2026-reflects a balancing act between inflation control and growth preservation. For growth stocks, particularly those in tech, the higher-for-longer rate environment has compressed valuations. High-duration assets, which thrive in low-rate environments, now face discounted cash flows that reduce their appeal. Meanwhile, value stocks, with their shorter durations and cash-generative profiles, have become more attractive.

Fiscal-Driven Inflation and the OBBBA's Shadow

The "One Big Beautiful Bill Act" (OBBBA), passed in July 2025, has exacerbated inflationary pressures through fiscal expansion. Tax cuts and increased government spending have added to the deficit, pushing inflation closer to 3%-well above the Fed's 2% target. This fiscal-led inflation, combined with the inflationary impact of Trump-era tariffs on Chinese imports, has created a "sticky" inflation environment.

The result? A broad-based rotation into value sectors. For example, JPMorgan's analysis highlights how the S&P 500's record concentration in growth stocks has given way to a more diversified market, with energy and financials leading the charge. Regional banks, in particular, have benefited from this shift. As trade flows realign-Mexico overtaking China in U.S. trade importance-banks have pivoted to supply chain finance, offering tailored solutions to middle-market and small businesses navigating nearshoring and friendshoring trends. This adaptation aligns with the TACO trade framework, where investors anticipate Trump's tendency to soften tariff threats, favoring sectors less exposed to global supply chain volatility.

The TACO Trade Framework: A Catalyst for Rotation

The TACO trade-originally coined as "Trump Always Chickens Out"-has evolved into a broader framework encompassing tariffs, AI, central banks, and OPEC. Its relevance in 2025 lies in its ability to predict market behavior during periods of policy uncertainty. When Trump announces aggressive tariff threats-such as a 200% levy on pharmaceuticals-markets initially dip. However, when these threats are scaled back, value stocks like Target and Best Buy outperform, as investors seek defensive plays.

This pattern has been amplified by the Fed's hawkish stance. For instance, the December 2025 "Great Rotation" saw capital flee tech stocks and flow into energy and financials, sectors insulated from the volatility of AI-driven narratives. JPMorgan's research further notes that AI-related capital expenditures, while a growth driver, are unlikely to offset the broader shift toward value until 2026.

Regional Banks and the TACO Trade in Action

Regional banks have emerged as key beneficiaries of the TACO trade. As trade policy shifts create uncertainty, these institutions have modernized their technology infrastructure and expanded into supply chain finance. For example, many have partnered with fintechs to offer automated loan underwriting and real-time dashboards, enabling clients to navigate tariff-driven disruptions. This agility has allowed regional banks to outperform larger peers in a fragmented market, further reinforcing the value sector's appeal.

Strategic Implications for Investors

For investors, the current environment demands a strategic reallocation toward value stocks and sectors with strong cash flow generation. JPMorgan's projections suggest that while AI infrastructure spending will grow, its impact on growth stocks will be tempered by the Fed's cautious approach and fiscal-driven inflation. Meanwhile, the TACO trade's predictability-rooted in Trump's policy reversals-provides a framework for timing entries into value sectors during tariff-related dips.

In conclusion, the Fed's tighter terminal rate, fiscal-led inflation, and the TACO trade framework have collectively reshaped investor sentiment. As the market navigates these forces, the shift from growth to value is not merely a cyclical correction but a structural realignment. For those seeking resilience in a high-inflation, policy-uncertain world, value stocks-and the strategic sectors they represent-offer a compelling path forward.