History will not help predict the effect of interest rate cuts. Why.

The start of Europe’s first major rate-cutting cycle in more than a decade is likely just a week away. The question is how this will change market positioning, sector rotation and investor sentiment. Previous cycles can hardly tell us how the tapering will play out, except in very interest-sensitive sectors like banking and real estate. Even they will depend a lot on the actual path of the economy and domestic issues.

There are some clear differences in the current environment that could have a big impact on investor behavior and how stocks will perform. The potential AI super cycle could impact margins, business models, technology leadership and many other areas of the market. A rate cut is unlikely to change that appetite for a moment and may even help fund new technology. Therefore, large-cap technology companies are most likely to remain dominant regardless of rates.

An overview of the thematic performance shows that the Magnificent Seven and mega-cap stocks remain at the top of the chart and continue to show a positive trend.

Both inflation and interest rates are higher than previous reductions in the last 20 years. More importantly, economic growth is still there, even if it is moderate.

“For stocks, this could mean an increase in value due to improved market sentiment,” UBS strategists wrote. They add that the positive effects on corporate earnings from improved consumer spending, business investment and reduced borrowing costs may take time to materialize.

The clear signs within the rate cut cycle don’t seem as clear as usual.

There are arguments for both value and growth, says Cheda. Real estate can benefit from lower interest rates, spurring new projects, but investors should focus on segments that have good structural demand, such as logistics centers, central offices or data centers. Banks usually face headwinds from lower interest rates, but this time credit risks should be reduced and lending demand should be boosted, which should provide support to earnings.

JP Morgan strategists led by Mislav Matejka argue that “If bond yields decline due to slowing economic growth, sector leaders are likely to be more cautious”

For the broader market, the pursuit of upside moves appears to have been dampened by a combination of previous ATHs, the reduced liquidity expected over the summer and the many unclear and missing details on the economic outlook.

“Overall, there is a sense that the signs point to consolidation rather than a continuation of the favorable trend for risk assets,” wrote an analyst at Metzler Capital Markets.

Sectors of focus:

• Shares of Apple suppliers could rise after the US tech giant reported a 52% rebound in iPhone shipments to China over the past month.
• Minerals are in focus after Australia and the European Union reached an agreement to increase cooperation and investment in the sector.