Stock market climbs by 585 points, propelled by anticipation of interest rate reduction
In a positive start to the week, U.S. equity indexes gapped up on Monday, sustaining 1%-plus gains. The S&P 500 Index rose 1.5% to 6,329, the Nasdaq Composite added 2.0% to 21,053, and the Dow Jones Industrial Average was up 1.3% to 44,173 by the closing bell on Monday.
Meanwhile, ON Semiconductor, a leading semiconductor manufacturer, forecasted its third-quarter earnings per share (EPS) to be between 54 cents and 64 cents, with revenue expected to range from $1.47 billion to $1.57 billion. This forecast comes after the company's stock has fallen 9.9% year to date and 16.4% over the trailing 12 months, primarily due to a decrease in demand for its chips from the auto industry.
Investment Strategies for a Potential Fed Rate Cut
For those investing for a potential Federal Reserve interest rate cut in the near future, it is suggested to focus on growth-oriented sectors like technology and small-cap stocks. These sectors tend to benefit most from lower rates due to cheaper capital costs and higher valuations based on future earnings projections. Additionally, long-duration bonds and high-yield corporate debt can also perform well because falling rates increase bond prices and reduce borrowing costs for corporations with strong balance sheets.
More specifically, growth stocks (tech, small caps, AI-related firms) benefit from lower rates as they reduce their cost of capital and increase the present value of future earnings, potentially boosting their stock prices. Long-duration bonds gain in value when interest rates fall because their fixed payments become more valuable relative to new lower-yielding bonds. High-yield corporate debt can benefit from easing borrowing costs, but investors should exercise caution in sectors with strong balance sheets.
On the other hand, defensive sectors such as Utilities and Consumer Staples may offer valuation stability and serve as hedges in an uncertain economic environment. Currencies and commodities positioning for a declining US dollar can be beneficial, for example by overweighting emerging market currencies and gold, which is a common hedge against inflation and geopolitical risk.
Precautions and Uncertainties
Rate cuts often coincide with weakening economic conditions, which can dampen overall stock market performance despite sectoral winners. The Fed has shown caution recently, with market expectations split and some economists arguing inflation and labor market strength could delay cuts until later in 2025 or beyond.
Staying diversified and managing risk is important given the uncertainty around timing and the macroeconomic backdrop. Some market participants, including BlackRock Global Chief Investment Officer of Fixed Income Rick Rieder, are talking about a double cut. However, the question for the September 16-17 Federal Open Market Committee meeting is not if the central bank will make a move, but how big the next Fed rate cut will be.
ON Semiconductor's Q2 Results and Future Outlook
ON Semiconductor's revenue for the second quarter was $1.47 billion, down from $1.74 billion a year ago but above the FactSet estimate of $1.45 billion. The company reported a second-quarter earnings per share of 53 cents, down from 96 cents for the same quarter in 2024 but in line with the FactSet-compiled consensus. ON Semiconductor's revenue from the auto industry during the second quarter was $733.2 million, which is the lowest total since the first quarter of 2022.
Other notable events include Berkshire Hathaway's BNSF working with Goldman Sachs to explore a takeover of a rival railroad, potentially CSX. Berkshire Hathaway bought approximately $4 billion worth of stock and sold approximately $7 billion for net sales of $3 billion in the second quarter. The Bureau of Labor Statistics will release the employment situation report for August on Friday, September 5. Last week, Union Pacific announced it will acquire Norfolk Southern for approximately $85 billion, creating a transcontinental railway with an enterprise value of approximately $250 billion upon completion.
In summary, for a potential Fed rate cut later in 2025, investors should overweight growth sectors, consider longer-duration bonds, maintain some defensive holdings, and prepare for a weaker dollar environment. However, it is essential to do so with caution due to economic uncertainties and inflation risks that might postpone or limit rate cuts.
- As the Federal Reserve considers a potential interest rate cut, investing in growth-oriented sectors such as technology and small-cap stocks could yield benefits due to cheaper capital costs and higher valuations based on future earnings projections.
- Long-duration bonds may also perform well under lower interest rates, as falling rates increase bond prices and reduce borrowing costs for corporations with strong balance sheets.
- In the technology domain, growth stocks like tech companies, small caps, and AI-related firms might see a boost in their stock prices due to lowered costs of capital and higher present values of future earnings.
