Positioning for the Fed rate cuts: A cross-asset playbook

Key points

• Softening labor data could prompt a shift in Fed’s stance, with markets now expecting rate cuts to begin as early as September. This will likely reshape the macro playbook across asset classes.
• Falling rates tend to support growth equities, bonds, gold, and income strategies, but persistent inflation risks mean selectivity is key.
• This may be a rare window to reposition portfolios – balancing income, defensiveness, and rate sensitivity ahead of a new policy cycle.

After a prolonged period of elevated interest rates aimed at taming inflation, signs of economic slowing and softer labor market data are starting to shift expectations. Investors are increasingly confident that the Federal Reserve is preparing to ease policy, potentially as soon as September.

Fed funds futures now imply more than two full rate cuts over the coming quarters. Treasury yields have fallen, equities are adjusting, and the U.S. dollar has started to weaken. For investors, this is no longer just a conversation about whether rate cuts are coming, but how to position portfolios for a changing cycle.

Equities: What to own as rates fall

Falling interest rates tend to support equity valuations, but the impact isn’t uniform. Sector, style, and quality all matter more as policy shifts direction.

Here's a strategy-led approach to equity positioning:

Tilt towards growth, selectively

Technology and other long-duration growth sectors tend to benefit most from lower yields. Lower discount rates make future earnings more valuable, which helps high-growth names. But investors need to be selective: some large-cap tech stocks already price in aggressive earnings assumptions.

Rotate into lagging cyclicals

If rate cuts successfully stabilize growth expectations, more economically sensitive areas of the market like small-caps, financials, and industrials could outperform. These segments have lagged the broader rally and may benefit from improved financing conditions.

Prioritize equity income

As bond yields decline, dividend yields regain appeal as investors look for alternative income strategies. Utilities, infrastructure, and high-dividend stocks could attract income-seeking capital. Consider rotating into sectors that offer both stability and sustainable payout ratios.

Tactically capture rate sensitivity in real assets

REITs and homebuilders are among the most rate-sensitive equity plays. Logistics REITs are gaining traction as global supply chains shift, while data centre REITs capture the increasing AI infrastructure demand. Residential-focused names and quality homebuilders also stand to benefit from falling mortgage rates and improved housing affordability.

Emphasize margin defensiveness

Tariffs and supply-side constraints could keep inflation sticky, raising the risk of stagflation. In that case, pricing power and operational quality become key differentiators.

In a slowing growth environment, companies with robust balance sheets, pricing power, and operational discipline are well positioned to hold up. Defensive sectors like healthcare, consumer staples, and select industrials can offer resilience with some upside. However, policy-related risks remain. For instance, tariffs could squeeze consumer margins, while potential price cuts on prescription drugs could challenge the earnings outlook for healthcare firms.

Consider currency impact for global portfolios

Fed rate cuts often weaken the U.S. dollar, but with U.S. debt levels rising and political uncertainty looming, USD softness may be more structural this cycle. For non-USD investors, this could impact returns on U.S. equities. Currency-hedged share classes or FX overlays may help manage this exposure.

Bonds: From yield to total return

Rate cuts have historically been a positive catalyst for bonds, especially for intermediate- and long-duration government debt. As yields fall, bond prices rise—providing capital gains on top of income. Here's how to position across segments:

Target the sweet spot: Intermediate duration (5–10 years)

These bonds strike a good balance between sensitivity to falling rates and insulation from long-end volatility. Investors often use intermediate Treasury or corporate bond ETFs as part of their core bond exposure.

Seek quality yield: Investment-grade credit

Investment-grade corporate bonds still offer attractive yields with relatively low credit risk. These can add income potential and enhance the quality of a fixed income allocation, especially during a period of falling rates.

Add tactical carry: Short-duration high yield

Short-term high-yield bonds may offer higher income without the longer-term interest rate risk. They can serve as a tactical addition to portfolios seeking better carry, while keeping duration low.

Position for a curve rebound: Steepener strategies

When the Fed starts cutting rates, short-term interest rates usually fall faster than long-term rates. This can cause the yield curve—essentially the difference between short- and long-term bond yields—to “steepen” back toward normal. Investors can position for this through:

• Steepener ETFs, which aim to benefit from a widening gap between short and long-term bond yields.
• Bond ladders, which involve buying bonds with staggered maturities (e.g., 1, 3, 5, and 10 years) to manage reinvestment risk and capture potential steepening.

These strategies aim to profit not just from falling rates, but from how different parts of the bond market react at different speeds.

Overall, with yields still elevated and policy support building, fixed income is increasingly positioned to deliver more than just capital preservation—it may once again become a source of meaningful total return.

Real assets: A hedge with upside

Real assets can complement traditional portfolios during easing cycles, especially when inflation and currency risks remain in play. Here’s how to think about positioning:

Allocate to Gold as a hedge

Gold tends to perform well when real yields fall and the dollar weakens. It can act as a store of value and hedge against policy missteps, inflation surprises, or geopolitical shocks. For those comfortable with more volatility, silver may offer an aggressive alternative, as it often moves in the same direction as gold but with bigger swings. Because of its mix of industrial and precious metal demand, silver can benefit more if global growth holds up.

Look to infrastructure for income and resilience

Infrastructure assets, particularly those tied to regulated utilities or inflation-linked revenues, can benefit from lower interest rates and attract capital seeking stable, long-term income. Listed infrastructure funds and ETFs may provide diversified exposure.

These real asset strategies can enhance portfolio diversification while also acting as inflation and volatility buffers as the cycle turns.

Bottom line

The Fed hasn’t cut yet, but markets are already moving. For investors, the opportunity lies in positioning ahead of the shift: balancing exposure across asset classes, focusing on quality within equities, extending bond duration selectively, and considering real assets as both diversifiers and hedges.

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