Fed Bets Push Wall Street Towards Small Stocks: As bets on a half-point rate cut by the U.S. Federal Reserve increase,
investors are shifting their investments towards economically sensitive sectors, moving away from traditionally safe areas.
Experts from Morgan Stanley, Goldman Sachs, and JPMorgan
noted that the impact of the rate cut size is less significant on stocks than the overall state of the U.S. economy.
This trend has been reflected in the financial markets,
with U.S. 10-year Treasury yields dropping by three points,
the dollar reaching its lowest level since January, and gold prices soaring to record highs.
This reflects growing investor anxiety and seeking safer assets amid potential market volatility.
Content
Increasing Bets
S&P 500 Performance
Divergence of Indices and Stocks
Impact of the Bond and Currency Markets
Tech Stocks Regaining Momentum
Fed Bets Push Wall Street Towards Small Stocks
The increasing bets on a half-point rate cut by the Fed have driven investors toward economically sensitive sectors,
moving away from extensive tech stocks considered safe havens.
Apple shares fell by 3% after warnings that the demand for the iPhone 16 Pro was below expectations.
Despite no significant changes in the S&P 500 on Monday, most listed stocks saw gains, reflecting a shift of funds into non-tech stocks.
S&P 500 Performance and Tech Stock Decline
This divergence is mainly due to the weak performance of major tech companies that dominate the main U.S. stock index.
Meanwhile, the equal-weighted measure within the S&P 500—
which gives companies like Target and Microsoft equal impact—has approached its all-time highs,
indicating a broader stock recovery this year.
John Stoltzfus from Oppenheimer Asset Management expects these shifts
to reflect minor market corrections after the significant volatility in the S&P 500.
U.S. Economy’s Impact on Stocks More Significant Than Rate Cut Size
With the Fed’s decision approaching, strategists from Morgan Stanley, Goldman Sachs,
and JPMorgan emphasized that the state of the U.S. economy is more critical to stocks than the rate cut size.
Kali Cox from Ritholtz Wealth Management predicted that the impact
of a rate cut would be minimal compared to the path of future reductions over the next year.
Divergence in Indices and Stocks
The S&P 500 remained stable at around 5625 points,
while the Nasdaq 100 fell by 0.6% and the Dow Jones Industrial Average rose by 0.4%.
The Bloomberg Magnificent Seven index declined by 1%,
while the Russell 2000, which includes smaller companies, increased by 0.6%.
This performance highlights the divergence between large and small stocks,
with bank stocks significantly outperforming the broader market,
buoyed by positive analyses of smooth economic landing prospects.
Impact of Bond and Currency Markets
U.S. 10-year Treasury yields fell by three basis points to 3.62%,
reflecting declining confidence in the long-term economy.
The dollar dropped to its lowest level since January, and gold prices reached record highs,
signaling a growing demand for safe-haven assets amid market volatility expectations.
Performance of Tech Companies and Their Market Influence
Giant tech companies like Nvidia and Microsoft have been significant
drivers of stock gains over the past two years due to their strong earnings and investments in AI technologies.
However, since the S&P 500 peaked in July,
the Magnificent Seven stocks have declined by over 6%,
while other sectors have started to gain momentum.
Tech Stocks Regaining Their Position
Paul Nolte from Murphy & Sylvest Wealth Management explains that
the winning stocks since July have been those outside the major tech sector,
yet technology is gradually regaining its market leadership.”
This recovery reflects a temporary reduction in tech exposure,
prompting investors to explore other sectors offering more significant opportunities.
Hedge Funds’ Return and Market Trends
According to a recent Morgan Stanley Prime Brokerage report,
hedge funds have resumed buying large tech stocks,
while defensive sectors like real estate and healthcare have experienced net sales.
This shift indicates investors’ readiness for a rate-cutting cycle and their bets on market recovery.
Stock and Bond Strategies and Divergent Expectations
According to Lisa Shalett of Morgan Stanley Wealth Management,
the markets show differing views on the future,
with stocks pricing in a smooth landing while bonds signal a potential recession.
If bonds are on the correct path, stocks may decline due to falling profits;
if bonds are wrong, rising interest rates could create headwinds for valuations.
Investor Recommendations Amid Market Tension
Goldman Sachs strategists, led by David Kostin, recommend caution,
noting that stock valuations remain limited at current levels, with economic growth as the main driver.
JPMorgan advised focusing on defensive sectors, expecting small companies to benefit from declining bond yields.
Conclusion
Amid market tensions driven by elections, the economy, and potential rate cuts,
markets remain cautious and on edge.
Savita Subramanian from Bank of America advised focusing on stocks with safe dividends,
emphasizing that sometimes the safest options are the best, even if they seem unexciting.
Fed Bets Push Wall Street Towards Small Stocks