Fed Rate Cuts Could Fuel Rotation Out of Big Tech, Says Jefferies
U.S. stock futures pointed to a modest rebound early Monday, following the S&P 500’s 1.6% drop on Friday—its sharpest one-day fall since May. The decline was triggered by weak jobs data and renewed tariff worries, raising fears of more short-term market volatility.
Despite this, Jefferies remains upbeat on the overall outlook for equities. Their strategists acknowledge a challenging seven-week stretch ahead, with limited Fed support and a softening labor market, but maintain a bullish stance. The Fed is expected to cut interest rates by 25 basis points at its September 17 meeting, trimming the target range to 4.00%–4.25%.
In a weekend note, Jefferies said: “It may be harder to pitch this view now, but we still see equities trending higher.” They point to a solid earnings season, where 85% of reporting S&P 500 companies have topped expectations—fueling upward revisions to forecasts and supporting stock prices.
However, Jefferies is sounding a note of caution on Big Tech. Now accounting for 44% of the S&P 500—its highest weight ever—it remains the top-performing sector, but they worry the rally may be losing steam. While not calling it a bubble, Jefferies warns valuations are stretched and the trade looks overextended.
Importantly, they highlight that falling interest rates tend to benefit the equal-weighted S&P 500 more than the cap-weighted index, which is dominated by tech giants. Their data shows that in past rate-cutting cycles over the last 35 years, equal-weighted stocks have consistently outperformed when Fed policy turns dovish.
Jefferies concludes: “We’re not forecasting a tech crash. But Friday’s jobs data could mark the beginning of a shift. Historically, Fed rate cuts have triggered leadership changes. This might be the right time to start rotating out of large-cap tech.”
