Following a weaker-than-expected jobs report, Wall Street sharply increased bets that the Federal Reserve will soon cut interest rates, creating fresh momentum across key equity sectors that typically outperform in looser monetary regimes.
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A rapid shift in market sentiment has taken place.
According to CME Group's FedWatch tool, traders are now pricing in an 86% probability that the Fed will lower rates by 0.25% in September. Just one week ago, after a hot June inflation report, that probability collapsed to 35%.
The dovish pivot doesn't stop there. Odds for another rate cut in October are at 65%, while markets assign a 53% chance for a third cut in December.
Will Rate Cuts Be Bullish Or Bearish For Stocks?
Generally, lower interest rates are supportive of riskier assets. When interest rates drop, the present value of future corporate earnings increases, borrowing becomes cheaper, and cash becomes less attractive, thereby fueling investment and demand for equities.
However, context matters. Rate cuts made during a recession often signal shrinking profits and declining demand, which offset the benefits of cheaper capital. But if cuts occur while growth is merely softening, stocks usually cheer.
Currently, a full-blown recession appears unlikely. U.S. gross domestic product grew at an annualized 3% pace in the second quarter, rebounding from a weak first quarter.
The Atlanta Fed's GDPNow model forecasts 2.1% growth in the third quarter.
According to prediction platform Kalshi, there's a 47% probability that growth will exceed 2% and just a 13% chance of a recession—defined as two consecutive quarters of negative GDP—before year-end.
Which Sectors Could Benefit Most From Lower Rates?
Tech Stocks
Growth stocks, particularly in the technology sector, are among the biggest beneficiaries. Lower rates reduce the discount on future profits, which is critical for tech firms with longer time horizons. The Nasdaq 100 – as tracked by the Invesco QQQ Trust (NASDAQ:QQQ) is already up 8% year-to-date, with further upside possible if rate cuts materialize.
Within the broader tech sector, companies with more delayed cash flows or in early growth stages stand to benefit the most from lower interest rates, such as those held in Cathie Wood's Ark Innovation ETF (NYSE:ARKK).
Real Estate
Real estate could stage a comeback. The Vanguard Real Estate ETF (NYSE:VNQ) is down 3% over the past 12 months, lagging the S&P 500's 12.6% rise. Residential real estate, in particular, stands to gain if mortgage rates drop and unlock demand from sidelined buyers. The iShares Mortgage Real Estate ETF (NYSE:REM) has fallen 8% over the same period.
Regional Banks
Rate-sensitive regional banks may rebound. Unlike larger financials, smaller lenders rely heavily on loan business. As long as economic activity remains solid, lower rates could revive lending demand. The SPDR S&P Regional Banking ETF (NYSE:KRE) is down 3% year-to-date, trailing the broader Financial Select Sector SPDR ETF (NYSE:XLF), which is up 6%.
Small-Cap Stocks
Small-cap stocks also stand to gain. The iShares Russell 2000 ETF (NYSE:IWM) is down 3.6% this year, underperforming the broader market. With heavier exposure to domestic activity and a greater reliance on credit, small caps often lead in a rate-cutting cycle.
Gold And Silver Miners
Finally, miners could extend their 2025 rally. Falling yields and a potentially weaker dollar make precious metals more attractive. The VanEck Gold Miners ETF (NYSE:GDX) has soared 53% year-to-date, tracking gold's repeated record highs. While the sector has already been a clear top performer, more gains are possible if rate cuts push real yields and the dollar even lower.
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