Fed rate cut playbook: Where markets could shine

Key points:

• The Fed is expected to cut rates this week, marking the start of an easing cycle after softer labor and inflation data. Equity leadership could broaden, with lower rates extending gains beyond mega-cap tech into small caps, utilities, financials, and emerging markets.
• Bonds and real assets regain their role, as medium-duration Treasuries and quality credit offer diversification while gold becomes more compelling with falling funding costs.
• Cash is no longer king. With money-market yields set to fade, idle cash risks underperforming. Investors can redeploy liquidity into bonds for yield, equities for growth, or real assets like gold and infrastructure for diversification.

The Fed looks set to cut rates this week after a string of softer data. Job growth has slowed, unemployment has edged up, producer prices turned negative in August, and consumer inflation was broadly in line. This marks the start of an easing cycle.

For long-term investors, the key is not the size of the cut, but how different asset classes and segments might respond.

Equities: Leadership broadens

Equities often benefit from easier monetary policy because lower rates reduce financing costs and improve valuations. The opportunity set is also expanding beyond mega-cap technology.

• Tech stocks: Lower discount rates help growth names, but the real story is in structural AI themes — semiconductors, cloud, and power-hungry data centres. Saxo’s AI value chain shortlist captures these areas, which continue to show earnings strength even as valuations in mega-cap tech look stretched.
• Utilities: Utilities are traditionally viewed as bond proxies, benefiting from lower yields through more attractive dividend payouts. This time, however, they also sit at the centre of the AI power boom, as electricity demand and grid investment rise. The sector could therefore benefit both from falling rates and from structural demand for power.
• Banks: Lower policy rates squeeze net interest margins (NIMs), especially if loan yields reset lower faster than deposit costs. That’s why banks sometimes lag when rate cuts begin. But if cuts extend the cycle and keep credit conditions healthy, banks can benefit from higher loan growth and lower default risk. Large U.S. banks may be more resilient, while EM banks often benefit more directly from a weaker USD and stronger capital inflows.
• Real Estate & Homebuilders: REITs gain from lower yields, but U.S. homebuilders are more nuanced - financing costs ease, yet oversupply risks could limit upside.
• Small caps: Smaller companies suffered under high borrowing costs, but cuts could ease the pressure and open the door for a catch-up trade. Valuations are attractive compared with history, though balance sheet strength will be critical in separating potential winners from over-leveraged firms, as highlighted in this article. The scope for relative outperformance is highest if economic growth stabilises rather than stalls.
• Emerging markets: A weaker dollar generally attracts flows into EM, easing external debt burdens and supporting equity performance. Asia’s exporters and commodity-linked economies stand out, but positioning remains nuanced. Countries with solid external balances and reform momentum are better placed, while fragile economies remain vulnerable to volatility if the dollar rebounds. We recently outlined 15 EM stocks in our article to show how investors can gain exposure to this theme.

In summary, any sector where large upfront capital spending meets long-dated cash flows — such as miners, utilities, renewables, infrastructure, pipelines, and REITs — stands to gain more than average when financing costs ease. Pairing these capital-heavy sectors with structural demand themes like AI power, electrification, and the energy transition makes the case even stronger.

Bonds: Quality as a diversifier

Quality fixed income offers attractive risk-reward and diversification benefits. Lower policy rates are likely to push Treasury yields down, creating space for government and investment-grade bonds to deliver mid-single-digit returns over the next year. If U.S. growth slows further, yields could fall quickly, giving bonds added capital gains.

• Medium-duration Treasuries: With policy rates set to fall, intermediate Treasuries can offer a sweet spot — long enough to capture capital gains if yields drop, but not so long as to be overly exposed to swings in the term premium. This makes them attractive as part of a balanced allocation.
• Inflation-linked bonds (TIPS): While headline inflation is easing, sticky services components and tariff risks for goods inflation mean inflation surprises cannot be ruled out. TIPS provide protection in such scenarios, helping investors manage the risk of real yields moving higher unexpectedly.
• Asia and Europe credit: Selective credit opportunities may also emerge as financing conditions ease globally. Spreads remain elevated in some markets, offering potential for returns beyond Treasuries, but careful selection is key to avoid credit traps in weaker names.
• Cash versus bonds: With cash yields likely to roll down as the Fed cuts, cash will underperform on a longer-term basis. Allocating more liquidity into quality fixed income may help investors maintain both income and diversification benefits.

Real assets: Gold and energy infrastructure

• Gold: For much of the past two years, high funding costs made gold less attractive as it pays no income. When cash and short-term bonds yielded 4–5%, holding gold came with a clear “carry drag.” As rates fall, that drag shrinks, making bullion more appealing for investors who had previously preferred yield. Meanwhile, structural trends continue to support gold as central bank demand remains robust, and with policy and geopolitical uncertainty still elevated, gold continues to play an important role as a hedge.
• Gold miners: Miners offer leveraged exposure to the gold price because revenues rise with bullion, while costs (energy, labour, equipment) move at a slower pace. When gold is trending higher, miners can outperform bullion, though they also carry greater volatility and operational risks.
• Infrastructure and energy: Lower financing costs are supportive for capital-intensive assets such as utilities, infrastructure, and real estate investment trusts. In particular, digital infrastructure and uranium play directly into the rising electricity demand created by AI, as data centres and grid upgrades require massive investment. These areas offer cyclical relief from falling rates and secular growth from structural demand shifts.

The role of cash: Don’t let it sit idle

Cash was a comfortable trade when deposits and money-market funds yielded 4–5%. With rate cuts on the way, those returns will fade quickly, making idle cash less attractive.

• Bonds as the next step: Shifting spare liquidity into quality fixed income can lock in attractive yields before they fall further. Bonds also provide diversification if growth slows and equities stumble.
• Equities for long-term growth: For investors with longer horizons, cash can be rotated into equities to capture compounding over time. Lower rates can broaden the equity rally beyond mega-cap tech into small caps, utilities, and emerging markets.
• Alternatives and real assets: Cash can also be redeployed into gold, infrastructure, or other real assets that benefit from easier financing conditions. This helps balance portfolios against inflation, policy mistakes, or geopolitical shocks.

Risks still loom

• Sticky inflation: Services inflation, particularly in housing and wages, remains elevated. Meanwhile, goods inflation faces risks from rising tariffs. If inflation does not continue to cool further, the Fed may be forced to slow or even halt its rate-cut cycle. That could dampen bond rallies and keep pressure on equity valuations.
• A “bad cut”: Not all cuts are equal. If easing is driven by deteriorating growth or recession fears, corporate earnings could fall. In that scenario, valuation relief from lower rates might not be enough to offset weaker fundamentals.
• AI roadblocks: The AI story has powered a large share of equity gains, but it is still early-stage. Delays in scaling data centres, bottlenecks in chip supply, or slower monetisation of AI services could challenge valuations. If the AI cycle disappoints, leadership in equities could narrow again.
• Political interference and Fed independence: Political pressure on the Fed could raise risk premiums across markets. A perception that monetary policy is being steered by politics, rather than data, could undermine investor confidence.
• USD rebound: A sudden resurgence in the U.S. dollar — triggered by stronger-than-expected U.S. growth, fiscal concerns abroad, or geopolitical shocks — could undermine EM and commodity-linked assets that usually benefit from easier policy.
• Geopolitical flashpoints: Conflicts in the Middle East, Taiwan Strait, or Eastern Europe could disrupt energy supplies, global trade, and investor sentiment. These risks may drive safe-haven flows into the dollar or gold, while weighing on risk assets.

Bottom line

Rate cuts mark a turning point in the policy cycle. Equities could broaden beyond mega-cap tech into small caps, utilities, and EM. Bonds regain their role as a true diversifier, while gold and infrastructure look more attractive as funding costs ease.

Most importantly, idle cash is set to underperform and it can be redeployed across bonds for yield, equities for growth, or real assets for diversification.

The Fed is shifting gears, but inflation, growth, and politics will shape the road ahead.