Key for Cedears: Which sectors will benefit from the first rate cuts by the Fed?

Today, the benchmark interest rate in the US stands at 5.25-5.50%, up from near-zero levels in 2022. Historically, stocks have outperformed after gradual rate cuts versus rapid reductionstypically seen during economic crises. Sectors of the economy are also affected in different ways, due to variations in consumer demand and sensitivity to interest rates.

Here’s how sectors performed after the first interest rate cut, based on data from PinPoint Macro Analytics.

Ranking: Sector performance during rate cut cycles

The average performance of each sector 12 months after the first rate cut between 1973 and 2024.

• Non-cyclical consumer goods: +7.7 pp
• Cyclical Consumer Goods: +7.0 pp
• Technology: +5.2 pp
• Health: +4.5 pp
• Business Services: -1.5 pp
• Industrial: -1.7 pp
• Telecommunications: -1.9 pp
• Non-Energetic Materials: -3.2 pp
• Consumer Services: -3.6 pp
• Energy: -6.2 pp
• Public Services: -7.6 pp
• Finance: -8.2 pp

Consumer goods Non-cyclicals experience the highest returns after the first rate cutparticularly during recessions, thanks to the constant demand for commodities.

Non-cyclical consumer goods, also known as essential or basic consumer goods, They are products and services that people buy regularly and that are necessary for daily life, regardless of the economic situation. These goods tend to be in constant demand, even during economic downturns.

Some examples of non-cyclical consumer goods include:

• food and drinks: products such as bread, milk, fruits, vegetables, bottled water, soft drinks and other basic foods.
• personal hygiene products: soaps, shampoos, toothpaste, deodorants and other personal care products.
• cleaning products: Detergents, cleaners and other household products.
• medicines and pharmaceutical products: over-the-counter and prescription medications, as well as health products.
• child care items: diapers, formulas and other baby products.

Companies operating in this sector include giants such as Procter & Gamble, Walmart and Coca-Cola, They offer essential products that people tend to buy regardless of the state of the economy. Notably, consumer goods are the only S&P 500 sector that has produced positive returns on average during the downturn phase of the business cycle since 1960. During the downturn phase, they also outperform the vast majority of sectors, averaging 15% returns over these periods.

Meanwhile, the technology sector has a fairly good performance in the market six months after the first rate cut, but performance recovers over a 12-month period, since lower interest rates generally benefit growth stocks by reducing borrowing costsHowever, some of today’s largest tech companies have been more resilient to higher rates due to large cash reserves and growing investor interest in AI-related stocks.

On the other hand, financial services historically experience the worst performance. This is because interest rate cuts often signal that the economy is slowing.putting pressure on loan growth, credit losses and default risk.