September 4, 2025
Fed Chairman Powell set the stage for US equities into year end with his Jackson Hole speech. Softer eco data is likely now a “good” thing in the near-term as it will reinforce conviction on a series of rate cuts which should loosen lending and improve financial conditions for a broader array of stocks. We’re already seeing signs that market participants are buying in. With NVDA’s recent earnings report failing to move the needle (realized strength only matched sky-high expectations rather than exceeding them), there has been an impetus for rotation. AI hyper-scalers and other related stocks have retraced some relative gains in the near-term and investors are shifting to bottom-fish in rate sensitive stocks. However, we’re seeing more interest in rate sensitive cyclicals than rate sensitive low vol. stocks in the near-term.
Since the beginning of July sector performance (chart below) has had a bullish tilt. Energy and Materials sectors have strengthened in the near-term along with Discretionary, Comm. Services and Financials. Healthcare stocks have improved as well, but the other lower vol. sectors (chart, middle panel) have shown a muted reaction to lower rates in the near-term.
Two areas that have caught our eye over the past month are housing and autos. The current bull cycle has attracted complaints that it has been powered primarily by AI speculation, but signs of expansion in the “real economy” have been more elusive. A persistent fear of emerging inflation has kept interest rates elevated during the cycle. Higher rates in turn dampened the activity in the housing market. Auto stocks (outside of TSLA) also had a tough time in this cycle as electrification and tariff implementation have been headwinds to legacy operating companies.
With the Fed now signaling support for the business cycle, we’re seeing investors start to discount better days ahead. Homebuilding stocks continue to improve in the near-term as 2yr and 10yr yields testing lows since April (chart below, bottom panel). With 2yr rates moving lower faster than 10yr rates, the yield curve is expanding which also putatively incentivizes more lending as it firms net interest margins for banks (they’ve improved too!). It will be interesting to see if this emerging “American Dream” trade (A home for every worker, a car in every driveway), reinvigorates bullish sentiment.
Homebuilders continue to show bullish reversal. DHI and PHM are favored names, but TOL, TMHC, LEN and KBH (below) are showing a similar bear-to-bull dynamic.
KBH
TSLA has been a leading stock in this cycle, but F and GM have been representative of the auto industries struggles. Those co.’s are now in bullish reversal as well (below).
F
GM
As are many auto component stocks. We highlight APTV and GNTX (below).
APTV
GNTX
Conclusion
Rate cuts typically signal rotation as investors look to accumulate discounted areas of the market that are potential beneficiaries of improving credit access and lower borrowing costs. In this cycle the interest is lining up behind cyclical exposures in autos and homebuilding. We think this rotation can continue in the near-term. Investors who take long positions in these stocks should be paying attention to commodities price inputs as the rate sensitive cyclical trade rests on a premise of benign inflation and a supportive Fed. The former has been a boogey man that hasn’t really materialized while the latter gains conviction on every tepid economic print that hits the tape in the near-term.
Data sourced from Factset Research Systems Inc.
