Societe Generale Advises 6% Increase in Stock Allocation Post Fed Rate Cut

Following the Federal Reserve's rate cut, strategists at Societe Generale have advised investors to allocate more funds into the stock market. Despite market volatility, the year has been notable for stock investors. The strategists highlighted that the 28 major asset classes within their recommended multi-asset investment portfolio are poised to benefit from the rate cut. They emphasized that the current economic conditions, which have not deteriorated, present a favorable environment for stock investments.

The strategists suggested that the good times will continue because the Federal Reserve is lowering interest rates in a non-recessionary environment. They recommended increasing the allocation of stocks in the global asset portfolio from 44% to 50%, while reducing cash holdings from 10% to 5%. This adjustment is part of a broader strategy to favor risk assets and expand the investment portfolio. The slight decrease in bond allocations, down to 35%, completes this shift.

Historically, a more dovish Federal Reserve has been shown to boost global stock markets, not just those in the United States. Despite signs that the "American exceptionalism" narrative is fading, corporate earnings remain resilient. This resilience is attributed to the strengthening profit cycle outside the tech and artificial intelligence sectors.

In an environment where private sector leverage is relatively low, stock valuations tend to increase with lower interest rates, leading to higher price-to-earnings ratios. As global fiscal spending rises and supply chains improve, earnings per share (EPS) are expected to continue growing. This, combined with the potential for the Federal Reserve to lower rates to a "new normal," could keep sell-offs in the S&P 500 index at bay and drive it to new highs.

For better returns, the strategists recommended the S&P 500 Equal Weight Index (SPW) and their own small-cap "ex-junk" portfolio, which excludes companies with weak balance sheets and losses. SPW is seen as a good indicator of small-cap strength.

The strategists also expressed interest in stocks outside the United States, doubling the weight of Japanese stocks while maintaining a stable allocation to European stocks and slightly increasing exposure to emerging markets. They highlighted the new fiscal dynamics in Germany, Japan's new pricing mechanisms, and the new phase of the bull market in China. Additionally, they noted the resurgence of Europe, driven not only by Germany's spending but also by the strong performance of peripheral countries like Italy and Spain.