Fed's "no-recession rate cuts": Traditional defensive strategies no longer work
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Fed's "no-recession rate cuts": Traditional defensive strategies no longer work
Investors are shifting from defensive stocks to cyclical and large-cap stocks, including sectors such as investment banking, technology, real estate, and automotive.
Navigating Web3 tides with focused insightsBy Li Xiaoyin, Wall Street Insights
With the Federal Reserve launching its first rate-cutting cycle in four years, has the stock market’s playbook for rate cuts changed?
Typically, when the Fed cuts rates to stimulate the economy, investors seeking safety favor defensive and high-dividend stocks, rotating away from growth sectors such as technology that are more sensitive to macroeconomic swings.
But this time, with the U.S. economy still showing resilience, rate cuts have instead triggered a rally led by tech stocks, pushed equity markets to new highs, sustained economic expansion, and improved corporate earnings outlooks.
In terms of capital flows following the rate cuts, investors are shifting from defensive stocks to cyclical ones.
According to Goldman Sachs’ prime brokerage data, last week hedge funds bought TMT (technology, media, and telecommunications) stocks for the third consecutive week, reaching the largest net position in four months. Meanwhile, defensive stocks saw their biggest net outflow in over two months, with utilities experiencing the largest capital outflow in more than five years.
Frank Monkam, Senior Portfolio Manager at Antimo Capital, said:
“The Fed is cutting rates significantly despite already accommodative financial conditions—a clear signal to the market to adopt an aggressive positioning.”
“Traditional defensive sectors like utilities or consumer staples may not be particularly attractive now.”
Why Is This Rate-Cutting Cycle Different from History?
Why is this being called a “non-recession rate cut”?
According to Bank of America, in eight out of nine easing cycles since 1970, rate cuts occurred during periods of slowing corporate earnings. But Savita Subramanian, the bank’s head of equity and quantitative strategy, wrote in a note to clients: “This time, earnings are expanding—which favors cyclical and large-cap stocks.”
This means the Fed isn’t cutting due to an economic downturn. As Subramanian noted:
“The Fed has no script—each easing cycle is unique.”
Historically, however, Fed rate cuts have generally led to broad market gains.
BofA data shows that in non-recessionary environments since 1970, the S&P 500 has risen an average of 21% in the year following the Fed’s first rate cut.
Shift in Investment Style: Banks, Tech, and Real Estate Gain Favor
So what investment style has emerged from this “non-recessionary rate cut”?
As Subramanian pointed out, investors are rotating into cyclical stocks, large caps, and other industries currently experiencing growth.
Sectors such as real estate and autos are also expected to benefit from looser financial conditions boosting consumer spending. Phil Blancato, CEO of Ladenburg Thalmann Asset Management, said:
“You’ll see more enthusiastic consumers—lower mortgage rates will stimulate spending, whether in housing or automobiles.”
Even traditional defensive plays like utilities remain strong, as the AI investment boom has enhanced the sector’s appeal. In fact, utilities are up 26% year-to-date, making them the second-best performing sector in the S&P 500.
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