U.S. stocks are poised for a relief rally after the Federal Reserve delivered a 50 basis-point interest rate cut on Wednesday. While the market initially responded with enthusiasm, failing to sustain the upward momentum, futures are signaling a strong opening on Thursday.
With the Fed’s decision now behind us, the spotlight is shifting towards earnings, with FedEx Corp. scheduled to report its results after the market closes. Traders will be closely watching for any significant developments in the earnings season, which could further influence market sentiment.
In addition to earnings, the market will remain attentive to key economic data releases, including the weekly jobless claims report, the Philadelphia Fed’s regional manufacturing survey, and the Conference Board’s leading economic index. These indicators will provide valuable insights into the health of the economy and could potentially generate volatility in the market.
Despite the possibility of a tech rally cool-off, tech and small-cap stocks are still positioned for a strong start. Volatility has been on the decline amid the risk-on mood, with the CBOE Volatility Index (VIX) dropping by approximately 9%.
This optimistic outlook is supported by analysts who believe that defensive and small-cap sectors, especially value stocks, are primed for outperformance following the initiation of the rate-cutting cycle. LPL Financial Chief Equity Strategist Jeff Buchbinder notes that value stocks tend to outperform growth counterparts three and six months after an initial rate cut, citing historical data from the 1995 monetary policy cycle as a compelling example.
Buchbinder further emphasizes the outperformance of defensive sectors, such as telecom services, consumer staples, and utilities, in the months following initial rate cuts. He highlights the 1995 period, characterized by a soft landing and technology buildout, as a particularly relevant case study. While financials performed well during the 1995 cycle, they showed more comparable results in the 2019 period, making it a more appropriate comparison to the current situation than the 2001 cycle.
Interestingly, the technology sector lagged behind the S&P 500 following the 1995 rate cut despite being in its early stages of internet buildout, as evidenced by Netscape’s initial public offering. However, Buchbinder cautions that the current tech sector, undergoing significant growth with advancements in artificial intelligence, might not necessarily benefit from a more accommodating Fed.
Carson Group Chief Market Strategist Ryan Detrick provides a positive perspective on the market’s long-term outlook. He highlights that the Fed has cut rates with stocks near all-time highs 20 times in the past, and in all instances, the S&P 500 was higher a year later. This historical data suggests that the current market conditions, with the S&P 500 at all-time highs and the Fed implementing rate cuts, could potentially lead to continued gains in the long run.
As the market navigates through this period of economic uncertainty and changing monetary policy, the coming weeks and months will be crucial for observing how the Fed’s actions, investor sentiment, and economic data releases shape the trajectory of the stock market.
