Fed's Bold Rate Cut Spurs Market Rally Cyclicals Poised for Rebound
1min read Barclays emphasizes that the Federal Reserve's unexpected decision to cut interest rates by 50 basis points highlights its commitment to achieving an economic soft landing. With the potential for U.S. economic rebound, cyclical stocks could see a steady comeback. Investors should watch the upcoming U.S. September PMI figures and the forthcoming Q3 earnings season for more insights.
The significant Fed rate cut has sparked a global market rally, with most assets appreciating except for U.S. Treasury bonds. Barclays advises against shorting cyclical stocks during this period as the Fed’s move supports economic growth, which is viewed positively by the market, with risk asset prices rising.
In a recent report, the Barclays analyst team, led by Emmanuel Cau, highlighted the Fed's decisive action to foster economic growth. This move aligns market sentiment with the Fed's goals, as evidenced by rising risk assets and a steeper yield curve.
Despite expectations for further rate reductions, Barclays warns that current market pricing may be overly optimistic compared to the Fed’s outlook. If upcoming data supports the U.S. economy’s soft landing, the Fed might not cut rates as aggressively as the market anticipates.
Barclays indicates that, absent any catalysts challenging the soft landing, the upward potential for U.S. stocks—especially cyclical stocks—remains strong. Historical patterns suggest these assets typically rebound steadily unless a recession follows the Fed’s rate cut cycle.
Cyclical stocks, previously oversold and undervalued, are appealing to investors at current valuations. Historically, the fourth quarter is a period when U.S. stocks perform well, with cyclical stocks often outperforming defensives. The market's defensive stance since the summer suggests a potential surprise with a cyclical rebound.
As the long-anticipated Fed rate cut unfolds, the market’s focus should return to fundamentals. The release of September PMI data alongside the Q3 earnings season is poised to provide further clues regarding the U.S. economy's short-term trajectory. Barclays notes that recent EPS revisions have turned negative but exceed the declines suggested by PMI data.
While discussions with clients post-Fed meeting reveal hesitance to increase exposure to cyclical stocks, largely due to potential downside risks from the upcoming earnings season, stable PMI figures and continued activity surprises may lead investors to overlook short-term earnings risks. The previously lowered expectations for Q3 earnings could ease the hurdles facing investors.