Tech Debt: Consider a Soft Landing in These Troubled Sectors

• A rate cut is now considered almost certain in September.
• Amid growing anticipation, technology stocks have struggled.
• This might be a good time to readjust your portfolio before a possible soft landing.
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Investor concerns are taking a back seat as market dynamics shift and new opportunities emerge. The Federal Reserve’s stance is also shifting, with the next rate cut no longer seen as an emergency measure but as a necessary adjustment.

The current policy is considered too restrictive in the face of changing economic conditions. Therefore, a rate cut is expected in September.

Against this backdrop, technology stocks have struggled of late, with a rotation into other neglected sectors seen in the first leg of the current pullback.

However, the second leg of the pullback has investors worried about a broader decline. This correction could be an opportunity to add stocks from these sectors that the market has ignored.

Rate cuts don’t always precede recession

In 2019, the Fed reversed course by lowering interest rates after raising them throughout the previous year. This change of course was decided in response to the slowing economy, paving the way for a more accommodative policy.

However, our collective memory tends to focus on the “emergency” rate cuts implemented just before recessions. We often wrongly associate all rate cuts with impending economic slowdowns.

This chart plots the performance of the S&P 500 (Y-axis, left scale) as a function of the date of the first interest rate cut in a cycle (right scale) and the number of days following the cut (X-axis).

The data reveal a key point: interest rate cuts do not equate to recessions. While some rate cuts coincide with recessions (red lines), many others (blue lines) occur without an economic slowdown.

Fed Rate Cut on the Horizon: Bullish Signal or Harbinger of Trouble?

Looking ahead to the July 31 Fed meeting, the chart offers valuable insight. Historically, stocks, like the S&P 500, tend to rally in the 3-6 months before the first rate cut (which is where we are now).

After a short period of consolidation following the policy change, the market typically sees an average return of 9-10% over the next 6-7 months.

Using historical data and assuming the no-recession scenario materializes this year and in 2025, the market is expected to continue to trend higher.

The key question, however, remains: will the Fed achieve a “soft landing” this time? A preemptive rate cut to maintain economic stability could support an uptrend for stocks. Conversely, a “hard landing” with a more aggressive rate hike could weigh negatively on stocks.

Currently, the market appears to be in a period of consolidation and rotation. Given the risk of a soft landing, investors may want to consider reducing their positions in the technology (NYSE:) and communications (NYSE:) sectors while increasing their exposure to interest rate-sensitive sectors like real estate (NYSE:), small caps (NYSE:) and defensive sectors like utilities (NYSE:).

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Disclaimer: This article is written for informational purposes only. It does not constitute a solicitation, offer, advice, opinion or investment recommendation. It is therefore not intended to encourage the purchase of assets in any way. I would like to remind you that any type of asset is evaluated from multiple angles and is very risky. Therefore, any investment decision and the associated risk are the responsibility of the investor.