Positioning for the Fed's Easing Cycle: Undervalued Cyclical Sectors in Housing, Commodities, and Consumer Goods

The global economy is at a pivotal juncture. Central banks, led by the Federal Reserve, are navigating a delicate balancing act between inflation control and economic stability. As of August 2025, the Fed has maintained a hawkish stance, keeping the federal funds rate steady at 4.25–4.5% amid moderate growth and stubborn inflation. However, the path forward is increasingly clear: a shift toward rate cuts in 2026 is now priced into markets, with Morgan Stanley forecasting up to seven reductions. This transition creates a unique opportunity for investors to position for cyclical sectors that have been historically sensitive to monetary easing—namely housing, commodities, and consumer goods.

The Fed's Pivot and Its Implications

The Federal Reserve's July 2025 policy statement underscored a data-dependent approach, with officials emphasizing the need to monitor inflation, labor markets, and global risks. While the committee remains cautious, internal dissent—most notably from dissenters like Michelle Bowman and Christopher Waller—signals growing support for rate cuts. The FOMC's “dot plot” now projects two cuts in 2025, though the timing remains contingent on incoming data. Crucially, the terminal rate for 2027 is projected at 3.4%, a stark contrast to the 5.25% peak in 2024. This trajectory reflects a recognition that prolonged high rates risk stifling growth without delivering meaningful inflation relief.

Cyclical Sectors: The Case for Housing, Commodities, and Consumer Goods

Housing: A Sector on the Cusp of Rebound

The housing market has been one of the most rate-sensitive sectors in recent years. Elevated mortgage rates, driven by the Fed's tightening cycle, have suppressed demand and led to a sharp correction in home prices. However, as the Fed pivots toward easing, the sector is poised for a rebound. Lower borrowing costs will directly improve affordability, while a weaker dollar (a byproduct of rate cuts) could boost export-driven construction materials. Morgan Stanley's analysis suggests that the first tangible benefits of rate cuts may materialize in early 2026, with mortgage rates declining to 5.5% or lower.

Commodities: Supply Constraints and Easing Demand

Commodities have faced dual pressures: supply-side disruptions from geopolitical tensions and demand-side headwinds from high rates. However, the anticipated rate cuts will alleviate financing costs for producers and consumers alike. For example, gold and copper—often seen as barometers of economic health—are likely to benefit from a weaker dollar and increased industrial activity. Additionally, energy prices may stabilize as global growth rebounds, supported by lower U.S. interest rates. Morgan Stanley's Mike Wilson highlights that commodities, particularly those with inelastic demand (e.g., copper for green energy), are undervalued and offer asymmetric upside.

Consumer Goods: Tariffs as a Short-Term Headwind, Long-Term Catalyst

Consumer goods have been hit by a combination of high rates and Trump-era tariffs, which have inflated costs and suppressed demand. Yet, these same tariffs may create a buying opportunity. As Wilson notes, the short-term drag on earnings will likely be followed by a V-shaped recovery once the Fed cuts rates. Lower rates will reduce consumer borrowing costs, while a weaker dollar could enhance the competitiveness of U.S. exports. Sectors like discretionary consumer goods (e.g., apparel, home furnishings) are particularly positioned to benefit from pent-up demand and improved affordability.

Tactical Entry Points and Risk Management

The key to capitalizing on these opportunities lies in timing. While the Fed's pivot is expected in early 2026, investors can begin positioning now by focusing on undervalued sub-sectors and companies with strong balance sheets. For housing, this includes homebuilders with low debt and exposure to affordable housing. In commodities, dollar-hedged producers and those with long-term supply contracts offer downside protection. For consumer goods, companies with pricing power and cost-cutting initiatives are best positioned to navigate the transition.

However, risks remain. A delayed Fed pivot or a sharper-than-expected inflation rebound could delay the recovery. Investors should also consider hedging against volatility in the near term, particularly in the third quarter of 2025, when markets may test the resilience of the current bull case.

Conclusion: A Strategic Inflection Point

The Fed's anticipated rate cuts in 2026 represent a strategic inflection point for cyclical sectors. Housing, commodities, and consumer goods—long sidelined by high rates and policy uncertainty—are now positioned to benefit from a more accommodative monetary environment. Morgan Stanley's Mike Wilson has consistently emphasized the importance of positioning ahead of the Fed's moves, and the current landscape offers a compelling case for tactical entry. As inflationary pressures ease and demand cycles rebound, these sectors could deliver outsized returns for investors willing to act decisively.

In a world of shifting macroeconomic dynamics, the ability to anticipate turning points is what separates successful investors from the rest. The Fed's pivot is no longer a question of if, but when. For those prepared to act, the rewards could be substantial.