Rate Cuts Are Back on the Menu – These Stocks Could Outperform in September

And just like that, interest rate cuts are back on the table!

At least that’s the not-so-subtle message signaled by the Federal Reserve’s confab on Friday.

At his final headlining speech in Jackson Hole, Wyoming, Fed Chair Jerome Powell uttered the words the White House has longed to hear: With “[monetary] policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.”

Expected odds of Fed rate cuts zoomed higher Friday afterward, with futures traders now pricing in an 85% chance that the Fed will cut rates by a quarter-point at its next policy meeting in September.

Stocks went zoom-zoom to the upside as well, following Powell’s statement – and for good reason.

If an interest rate cut does come our way in September, as expected, it means the Fed will have taken a nine-month break since its previous cuts in 2024. And historically, the restarting of rate cuts after a long pause is bullish for stocks, with the S&P 500 up a year later 10 out of the last 11 times these breaks have happened:

As you can see above, there have been 11 other times the Fed paused its rate cutting cycle for 5 to 12 months since 1970. When that pause ended, the S&P 500 was higher 91% of the time one year after rate cuts resumed, posting median gains of 14.5%.

The only outlier in our sample was in 2001 during the dot-com bust, when the S&P resumed its slide despite lower rates – and was down -14.3% a year later.

Now, the table above also shows that stock returns were very much a mixed bag at first, immediately following the first post-pause cut: History shows the S&P 500 posted an average loss of -1.3% three months after rate cuts resumed following a pause.

But bullish investors shouldn’t be too anxious to pull the trigger and buy now.

Those post-cut losses are no surprise if you think about it.

Generally, when the Fed cuts interest rates, it’s because economic growth may already be in trouble. That means that despite freshly lower interest rates, the economy and stock market often get worse before getting better.

This time around, corporate profits are growing nicely… but there has also been some softness in recent economic data. That’s especially true for employment after big negative revisions to recent jobs data reports, which is apparently what got the Fed’s attention.

So, the question is, what’s the game plan for more interest rate cuts ahead?

Again, looking at the past tells us what to expect in the future. So, if you think growth stocks have the upper hand in the coming months, you may want to think again!

Ironically, it is defensive sectors – and quality stocks – that often outperform as rates fall.

While this may be contrary to popular belief, growth stocks perform best when overall growth is hard to come by. That’s precisely why the “Mag 7” tech stocks have performed so well lately, amid concerns about slowing growth across the U.S. economy.

But growth in sales, profits and the economy as a whole are easier to come by as interest rates fall and money gets easier to borrow. That’s when defensive stocks and sectors like healthcare, consumer defensives, and stodgy old utilities perform best.

Part of the attraction here comes from the higher-than-average dividend yields that have become a feature of stocks in these defensive sectors. Dividends get more attractive as interest rates decline, after all.

This time around, though, I would also consider sectors that have been interest rate repressed since the Fed went on hold. This includes stocks in the financial and industrial sectors.

As rates fall, financials win because lower short-term rates can boost banks’ net-interest margins, while borrowing in general typically rises.

Industrial stocks on the other hand are capital intensive, so lower borrowing costs can provide a cash flow boost.

Also, as my colleague Lucas Downey pointed out recently, small-cap stocks often outperform large-caps as interest rates decline. And small-caps are certainly overdue for some good performance:

Plus, small-cap profits are set to grow faster than large cap earnings, providing another possible boost to their performance…

But we don’t have to stop there: Using our trusty TradeSmith Screener tool, we can easily zero in on the specific stocks that could be most likely to benefit from the renewed Fed rate cuts in September markets are now expecting.

To get started, simply log into your TradeSmith Finance account – then click on Invest at the top of your Dashboard. Finally, select Screener from the sub menu to access our trusty market-scanning tool.

As a reminder, you must be subscribed to Trade360, TradeSmith Platinum, or Ideas by TradeSmith to have access to this powerful tool.

If you don’t see this tool on your platform, but would like to, simply call 888-623-0858 to speak with our Customer Care team and learn how to get access. Then you can build your own stock screeners with just a few clicks!

Prospect For Lower Interest Rate Winners with the TradeSmith Screener!

Today’s screener relies on just four filters to find stocks primed to benefit from lower rates – and you can quickly and easily add those filters to your own screener by clicking on the + Add Filter button near the top of the Screener page:

You can click on any existing filters and select the Remove button to cut them from your current screener setup. This time, we’ll only need the following filters:

• Health: Only “Green Zone” and “Yellow Zone” stocks need apply here,
• Business Quality Score: Set to “> 80.00” to select only the top 20% of stocks ranked by quality,
• Markets: Simply check the boxes here for “S&P 500 (SPX),” “S&P 400 (MID),” and “S&P 600 (SML)” to include small, mid and large cap stocks,
• And Sectors: Finally, I’ll narrow our search to just the sectors we discussed earlier, that should benefit most from lower interest rates. Check the boxes here to include “Consumer Defensive,” “Financial Services,” “Healthcare,” “Industrials,” and “Utilities” to complete our screener.

These TradeSmith Screener filters can guide you to high-quality stocks in the five sectors most likely to benefit from lower interest rates. And we’ll look for possible buy candidates among the full S&P 1500, which includes small-cap, mid-cap, and large-cap stocks.

But remember, you don’t have to limit yourself to just these filters alone. Click on the + Add Filter button before running your screener, and you can include as many additional filters as you desire.

Mix it up by including fundamental, valuation, and market classification filters to make your screener unique. And you may want to include some TradeSmith exclusive filters to keep leveraging our world-class research. Just remember to click the Save… button to keep your customized screener on hand for later!

When I ran this screener yesterday, with just the four filters above, I got 129 results. That’s plenty of names to start with as we do additional research. And this is where you may want to add a few more of your favorite filters – to narrow the results further.

The top 20 results from my screener are shown below, due to limited space. I sorted the list by Market Cap ASC (ascending), to view the smaller-cap stocks at the top of the list:

These stocks come from a range of different sub-industries within the five sectors we filtered by. This gives you plenty of options worthy of further research.

Bottom Line: Interest rates may soon be heading lower at last. If so, stocks may or may not zoom to the upside right away, but ninety percent of the time the S&P 500 is higher 12 months later – and posts better than average gains.

The sectors and stocks we zeroed in on with this screener are historically among the best performers amid lower borrowing costs… and could be worth considering before rates move again.

Good investing,

Mike Burnick
Senior Analyst, TradeSmith

P.S. Markets – and the White House – have been eager for the Fed to lower rates for months now, and Powell’s comments on Friday have sent a wave of excitement through Wall Street. If the Fed does bring rates down next month, it could push prices even higher: Institutional and retail investors seem eager to go risk-on, and lower rates could be the green light they need to dive in.

We can’t say for sure how the Fed’s September meeting will turn out – or how markets will respond – but here at TradeSmith, we follow the data. And the data provided by our market-scanning algorithms says that there’s something major rumbling just beneath the market.

Patterns are reappearing and lining up in ways that we haven’t seen since the ’96 tech boom… and they suggest that we may not just see a shift in the market in the coming weeks, but the start of a trend that could create incredible wealth over the next few years.

According to our data, we may not see another event like this until 2077.

That’s why TradeSmith’s CEO, Keith Kaplan, has gone online with a special presentation: He’s determined to share the warnings provided by our algorithms, and he’s even prepared to share the data and research that allowed us to identify this upcoming market shift in the first place.

What’s more – Keith has identified 10 stocks that are primed to rise in the wake of this major market shift. He’s calling it “The Last Melt-Up…” because it could be the last one of this type we see in the next 50 years.

Click HERE to get all the details from Keith, and make sure you’re prepared.