Investing.com -- Wells Fargo analysts suggested in a note Friday that the momentum behind the S&P 500 rally may continue, driven by a favorable rate environment and anchored inflation expectations.
The index has gained 1.6% so far this week, closing at a record 5714, as the Federal Reserve’s recent 50 basis-point rate cut sparked optimism about a "soft" economic landing.
Wells Fargo noted that "lower nominal rates should be mostly driven by falling real rates," a dynamic that bodes well for equities, particularly high-growth firms.
The report highlights that despite the significant rate cut, the market showed little deviation between large-cap growth (+1.8%) and value (+1.6%), with small caps (+3.2%) and midcaps (+3.0%) showing stronger performance.
Momentum factors are said to have remained intact, with the MTUM ETF up 26% year-to-date, outperforming the S&P 500’s 19% gain. This, according to the analysts, is due to the Fed signaling smaller 25 basis-point cuts ahead rather than another aggressive 50bp reduction, "protecting the status quo."
Looking ahead, Wells Fargo notes that historical data suggests specific sectors tend to benefit the most in the early stages of Fed easing cycles.
They state that the top-performing sectors over the next year are expected to be Information Technology, Consumer Discretionary, and Health Care. In contrast, Real Estate, Utilities, and Financials are expected to lag. Large-cap stocks, particularly growth-oriented ones, are anticipated to outperform small and midcaps.
The key driver for continued equity gains will be declining real rates, according to the bank.
They note that since May, real 10-year U.S. Treasury yields have dropped from 2.25% to 1.55%, contributing to the S&P 500’s 9% rise over the same period. The report concludes that there is further room for real rates to fall, which should "keep equities on an upward trajectory."