Which industries are the best and worst performers after the interest rate cut?

Fed Chairman Jerome Powell has signaled interest rate cuts are on the horizon amid a cooling labor market marked by fewer job additions and rising unemployment.

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

This graph, via Dorothy Neufeld of Visual Capitalist, breaks down the sector’s performance after the first interest rate cut, based on data from PinPoint Macro Analytics.

Ranked: Sector performance during rate cut cycles

Below, we show the average performance of each sector relative to the broader equity market 12 months after the first interest rate cut between 1973 and 2024:

Average historical data of rate cycles from 1973 to present.

Non-cyclical consumers we see the strongest returns after the first rate cut, especially during recessions, due to steady demand for basic goods.

This traditionally defensive sector includes companies such as Procter & Gamble, Walmart and Coca-Cola. In particular, consumer staples are the only S&P 500 sector that produced positive returns on average during the downturn phase of the business cycle since 1960. During the slowdown phase, it also outperformed the vast majority of sectors, posting average returns of 15% during these periods.

Meanwhile, the technology sector underperforms the market six months after the first rate cut, but returns to performance over a 12-month period as lower interest rates generally benefit growth stocks by reducing borrowing costs. However, some of today’s biggest tech companies have been more resilient to higher rates due to large cash reserves and increased investor interest in AI-related stocks.

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

To learn more about this topic from the perspective of sectoral composition, see this graph on the largest company in each S&P 500 sector in 2024.

By Zerohedge.com

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