In a note to clients on Wednesday, analysts at Barclays (LON:BARC) raised concerns that upcoming Federal Reserve rate cuts and the 2024 U.S. presidential election could pose negative catalysts for Growth and Large-cap stocks.
The bank explains that historically, these events have benefited other factors like Yield, Value, and Small-cap stocks, which may challenge the current preference for Growth and Large caps.
Barclays’ analysis, which spans from 1984 to the present, examined 11 Fed rate-cutting cycles and 10 U.S. presidential elections.
The findings show that the "first" rate cuts typically boost Total Yield, a factor comprising dividends and buybacks, while negatively impacting Volatility.
The bank states that specifically, Yield delivered consistently positive returns over three- and six-month periods following the initial rate cuts, as declining rates make income-generating assets more attractive.
On the other hand, Volatility's performance "was consistently negative" over the same time, often influenced by recessionary conditions.
Interestingly, Small-cap stocks underperformed Large caps in the nine months following rate cuts but eventually rebounded, aligning with Barclays’ earlier identification of Small caps as late-recession and early-expansion plays.
When it comes to U.S. presidential elections, Barclays says Value and Small-cap stocks have historically outperformed.
They note that these factors consistently delivered strong returns over three-, six-, and twelve-month periods post-election.
In contrast, Momentum showed negative returns in the short term, which Barclays attributes to a possible rotation into Value-oriented names during election cycles.
The bank acknowledges that these historical trends contradict their fundamental preference for Growth and Large caps, which they favor due to their strong sales and EPS growth, balance sheet resilience, and favorable valuations amid easing rates.
However, the analysts caution that the historical performance of Value and Small caps around these key events presents a clear risk to their outlook, warranting close monitoring as these catalysts approach.