Data compiled by Strategas Securities shows that in the past 30 years of four interest rate cut cycles, investors have pursued stocks of sectors such as utilities, essential consumer goods, and healthcare, which pay high dividends and are favored by income-oriented investors when bond yields decline.

However, looking at the stock performance before and after this interest rate meeting, there seems to have been some changes. Statistics on the top ten gainers of the S&P 500 index last week revealed a concentration of stocks in utilities, non-essential consumer goods, information technology, and financial sectors. Looking at the trends of various sectors in the S&P 500 this month, $Consumer Discretionary Select Sector SPDR Fund (XLY.US)$ has performed the best with a cumulative increase of 5.47%, followed by $Utilities Select Sector SPDR Fund (XLU.US)$ and $The Communication Services Select Sector SPDR® Fund (XLC.US)$ , with cumulative increases of 4.89% and 2.67% respectively.

Compared with previous interest rate cuts, the market reaction this time is somewhat "different", what are the reasons behind this? What insights does this have for future US stock investments?

The market is heavily betting on "interest rate cuts + soft landing"! What are the chances of winning?

Analysts predict that the trading logic of a "soft landing" in the US stock market is obvious. Traditional defensive stocks may no longer be attractive. Under the premise of betting on economic growth and falling interest rates, investors are attracted to stocks that will benefit from increased spending by Americans. This may be the reason why non-essential consumer stocks and technology growth stocks are rising "against common sense".

In addition, in the electrical utilities sector leading the pack, the rise of electric power stocks $Constellation Energy (CEG.US)$ Nvidia. $Vistra Energy (VST.US)$ The catalyst for the rise is not due to high dividends, but is being driven by the artificial intelligence boom.

$Constellation Energy (CEG.US)$ Last Friday, the company announced that it has signed a 20-year power purchase agreement with $Microsoft (MSFT.US)$ which will use the purchased electricity to help power its datacenters with carbon-free energy in the PJM region.

During the previous interest rate meeting, Powell's description of the U.S. economic situation still leans towards a 'soft landing'. The Federal Reserve then took a larger 50 basis point rate cut on this basis, indicating a low tolerance for rising unemployment rates. Officials are cautious not to risk disrupting the bright prospects of a 'soft landing'.

Other signs in the current market environment are also flashing 'soft landing' signals. Firstly, institutional investors are increasingly confident in a soft landing. A recent survey by Bank of America showed that 79% of fund managers believe in a soft landing, the most optimistic level in over a year; additionally, 11% of respondents believe in a 'hard landing' in the next 12 months, while 7% are betting on a scenario where there will be 'no landing'.

On the other hand, on September 4, the U.S. bond yield curve ended its longest-ever inverted period. According to industry statistics, the duration of this round of U.S. bond yield curve inversion (from July 2022 to August 2024) lasted over 780 days. Historically, an inverted key U.S. bond yield curve has always been a sign of an economic recession.

Priya Misra, portfolio manager at JPMorgan Asset Management, believes that the inverted yield curve ahead of the Fed rate cut was very meaningful. She added that the market's pricing of the extent of easing aligns with the Fed's goal of normalizing rates to maintain the expected soft landing of the current economy.

The sharp increase in bets on a soft landing may indicate that investors need to pay more attention to economic data in the future. Looking ahead to this week, the Bureau of Economic Analysis in the USA will release the latest data on second-quarter GDP growth on Thursday and the Personal Consumption Expenditures Index measuring inflation in August on Friday, providing investors with a deeper insight into the economic situation.

Which assets will benefit if a soft landing is successfully achieved?

"Soft landing" refers to maintaining steady economic growth after monetary policy tightening, while inflation continues to decline. The Federal Reserve often implements a slight interest rate cut to guide a soft landing, leading to a decrease in US bond yields and an increase in US stocks. This is because the resilience of economic growth can support corporate earnings, while central bank rate cuts can reduce risk-free rates and financing costs, thereby supporting valuation expansion.

Research by Zhongjin shows that US stocks have achieved positive returns under the premise of a successful soft landing. Since 1965, the Federal Reserve has achieved 4 soft landings, with an average increase in US stocks of 21% in the year following the Fed's shift to rate cuts, ranging from a minimum of 2% to a maximum of 34%.

The interest rate cut cycle that began in 1995 was the most typical soft landing scenario since the 1990s. In the second half of 1995, the best-performing sectors were biomedical, healthcare equipment and services, and diversified finance.

Furthermore, Bank of America strategist Bill Merz believes that in terms of market performance, cyclical stocks, technology growth stocks, and defensive stocks stand out the most after the rate cut, indicating that investors are optimistic about the long-term growth potential of the US economy while preparing for the possibility of a short-term economic slowdown.

From the perspective of fund inflows, investors appear to be re-entering large-cap technology stocks and other growth stocks in the market. According to Goldman Sachs' bulk brokerage data, last week, hedge funds net bought US technology, media, and telecom stocks at the highest rate in four months. The reasons may be that the rate cut is beneficial for alleviating valuation pressure on technology growth stocks, and it also helps alleviate financing and financial pressures on mid-cap and cyclical value companies.

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