The Fed cut interest rates significantly by 50 basis points, triggering the global market last week. Apart from U.S. bonds, almost all assets saw a sharp rise. Barclays believes that the significant rate cut will help the U.S. economy achieve a soft landing. In this situation, investors should not go against the Fed and should avoid shorting cyclical stocks.

In the report released last Friday, Barclays' analyst team led by Emmanuel Cau wrote:

It is now evident that the Fed has shifted to a growth protection mode. Time will tell, but with upcoming data staying steady, the possibility of a soft landing still exists.

The report indicates that the Fed's unexpected 50 basis point rate cut to support economic growth demonstrates its commitment to achieving a soft landing. The market has reacted positively to this policy adjustment, with prices of risk assets rising and the bearish yield curve steepening, indicating investor alignment with the Fed's goals.

However, despite market expectations for 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 significantly as the market expects.

Barclays states that without catalysts challenging a soft landing, the resistance to the rise of U.S. stocks, especially cyclical stocks, is minimal. Historical experience shows that as long as a recession does not follow the Fed's rate cutting cycle, these assets usually rebound steadily.

Despite adverse factors such as a slowdown in Asian growth and uncertainty surrounding the U.S. elections, recent positive surprises in the U.S. and EU economies, along with the steepening of the yield curve, provide additional fundamental support for cyclical stocks.

Cyclical stocks were oversold before and fundamentally undervalued, making their valuation still attractive to investors. In history, the fourth quarter is usually the best period for the performance of US stocks, with cyclical stocks often outperforming defensive stocks. In addition, the defensive positioning of the stock market since the summer may surprise many investors with the rebound of cyclical stocks.

Barclays finally pointed out that with the long-awaited Fed rate cut in the past, the market should refocus on the fundamentals. The September PMI data released this week, as well as the upcoming third-quarter earnings season, will provide more clues about the short-term trend of the US economy. The institution wrote:

We have noticed that the recent earnings per share (EPS) revision has turned negative again, but the decline exceeds the level implied by the PMI. In our recent discussions with clients about the Fed meeting, it seems that most people are not eager to increase their exposure to cyclical stocks, as the upcoming third-quarter earnings season is seen as a potential downside risk.

But if the PMI stabilizes and the broader activity continues to rebound pleasantly, investors may decide to overlook the recent earnings risk. This is particularly true because the market's general expectations for third-quarter earnings have decreased since the summer, reducing the threshold that investors need to cross.

Editor/Lambor