Don't Fight the Fed, Cyclical Stocks' Time is Now!
The Federal Reserve has significantly cut interest rates by 50 basis points, which has completely ignited the global market this week, with almost all assets soaring except for U.S. Treasuries.
Barclays believes that the substantial rate cut will help the U.S. economy achieve a soft landing, and under such circumstances, investors should not go against the Fed and should avoid shorting cyclical stocks.
In a report released on Friday, Barclays' analyst team led by Emmanuel Cau wrote: "It is now clear that the Fed has shifted to a growth protection mode.
Time will tell, but with the upcoming data remaining stable, the possibility of a soft landing still exists."
The report pointed out that the Fed's support for economic growth through a 50 basis point rate cut demonstrates its commitment to achieving a soft landing.
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The market has reacted positively to this policy adjustment, with the prices of risk assets rising and the yield curve steepening in a bear market, indicating that investors agree with the Fed's goals.
However, despite market expectations of more rate cuts in the future, the current pricing appears overly optimistic compared to the Fed's expectations.
Barclays believes that if the upcoming data supports a soft landing for the U.S. economy, the Fed may not cut rates as much as the market expects.
Barclays stated that in the absence of catalysts challenging a soft landing, the upward resistance of U.S. stocks, especially cyclical stocks, is minimal.
Historical experience has shown that these assets usually rebound steadily as long as a recession does not follow the Fed's rate-cutting cycle.
Despite the unfavorable factors of slowing growth in Asia and uncertainty in the U.S. elections, recent positive surprises in the U.S. and EU economies, along with the steepening of the yield curve in a bear market, provide additional fundamental support for cyclical stocks.
Cyclical stocks were previously oversold and their fundamentals were underestimated, and their valuations remain attractive to investors.
Moreover, historically, the fourth quarter is usually the best-performing period for U.S. stocks, with cyclical stocks often outperforming defensive stocks.
In addition, due to the defensive positioning of the stock market since the summer, the rebound of cyclical stocks may surprise many investors.
Barclays finally pointed out that as the long-awaited first rate cut by the Fed has become the past, the market should refocus on fundamentals.
The September PMI data to be released next week, along with the upcoming third-quarter earnings season, will provide more clues about the short-term trend of the U.S. economy.
The institution wrote: "We have noticed that the recent EPS revision has turned negative again, but the decline is greater than what the PMI suggests.
In our recent conversations with clients about the Fed's meeting, it seems that most people are not in a hurry to increase their exposure to cyclical stocks, as the upcoming third-quarter earnings season is seen as a potential source of downside risk.
However, if the PMI stabilizes and broader activity surprises continue to rebound, investors may decide to ignore recent earnings risks.
Especially since the market's general expectations for third-quarter earnings have been lowered since the summer, which lowers the threshold that investors need to cross."
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