Schroder stated that momentum stocks, growth stocks, and high-quality stocks will outperform the market based on expectations that the US economy will not experience a recession and the Fed may cut interest rates in September 2024. At the same time, in the environment of interest rate cuts, defensive industry sectors may perform well as compared to cyclical industry sectors. Defensive industry sectors usually perform better than cyclical industry sectors after the Fed's first rate cut.

This is particularly evident during economic recessions, as investors seek to invest in sectors that are most likely to withstand weak economic growth and benefit from more aggressive rate cuts. From a historical perspective, momentum investment strategies and technology stocks usually perform well when the US inflation rate approaches the Fed's target of 2%.

In contrast, most cyclical industry sectors usually perform poorly in the first three months after the first rate cut, and their performance is even worse when rate cuts occur during an economic recession. However, one year after the start of a monetary easing cycle, cyclical industry sectors usually provide stronger returns.

Initially, cyclical stocks were sold off due to weak economic growth and easing inflationary pressures. However, as the valuations of these stocks become cheaper and investors expect rate cuts to boost economic activity and corporate earnings, these industry sectors become more attractive. However, the financial and non-essential consumer goods industries are exceptions, as they generally perform well even in the first few months after the first rate cut.

It is worth noting that the technology industry generally lags behind the market in the first few months after rate cuts. Under the rate cut cycle, high-quality stocks and growth stocks usually record gains, but with a slightly lower rate than cyclical stocks. Cyclical industry sectors such as technology usually perform better when the stock market is rising, but also experience greater declines when the market is falling. During the Fed's monetary easing cycle during an economic downturn, the performance of growth stocks, high-quality stocks, and momentum stocks is even worse.

This may be because investors tend to invest in defensive industry sectors in the financial market, such as low-volatility stocks, during an economic downturn induced by the Fed's monetary easing cycle.

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