Interest rates are residing at the highest levels in two decades. Also, there’s some evidence of cooling in the labor market. The prevailing wisdom is that the Federal Reserve has no choice but to institute rate cuts.
There’s also a cacophony of market observers asserting that the central bank must pare rates by at least 50 basis points. We still have to see if the Fed pursues that course of action. If it is, it could benefit an array of rate-sensitive technology equities and ETFs. That group includes the VanEck Semiconductor ETF (SMH ).
As of the end of August, SMH sported a 39.23% year-to-date gain. This could limit significant upside attributable to rate cuts. However, that’s not necessarily the case. SMH resides 14% below its 52-week high, indicating a rate cut pick me up could be useful. Plus, lower rates would favor companies that need to make significant capital commitments to drive artificial intelligence (AI) advancements. This is applicable to multiple SMH holdings.
SMH Has Rate Cut Leverage
There is considerable rate buzz and it’s been mounting for several months, indicating that if the Fed obliges, large- and mega-cap growth stocks, including SMH member firms, could be poised for near-term upside.
“If the central bank delivers a significant rate reduction, we would expect to see major indexes like the S&P 500 and NASDAQ reach fresh highs next month,” noted deVere Group CEO Nigel Green. “The tech sector, in particular, stands to benefit from lower interest rates. Cyclical sectors, such as consumer discretionary and industrials, could also see a resurgence as consumer spending and business investment pick up in response to the Fed’s action.”
However, it must be acknowledged that rates don’t benefit all companies in linear fashion. Some sectors are more rate-sensitive than others. Additionally, while lower rates would likely be positive for firms carrying low credit ratings and significant debt burdens, that doesn’t imply investors should become excessively allocated to those firms. That is to say even if rates decline, there’s still merit in quality traits – a box checked by many SMH holdings.
“While lower interest rates will benefit many sectors, not all companies are positioned to capitalize on the potential market upswing. Strong balance sheets, consistent earnings growth, and sustainable business models will be key to the new landscape for investors,” added Green.
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