blog - 23 Sept 2025
Capitalizing on Rate Cuts
Industries Poised for Growth and Factors That Matter Most
Note: This blog has been updated following the Fed’s September rate cuts.
As projected when this blog was originally published in July, the Federal Reserve has lowered the federal funds rate by 0.25 percentage points, setting the new target range at 4.00%–4.25%. This move reflects the Fed’s response to rising economic uncertainty and increasing risks to employment. In its announcement, the Fed emphasized that future rate decisions will be guided by incoming economic data and evolving risk factors. The Committee also reaffirmed its commitment to reducing the balance sheet and maintaining its long-term objectives of maximum employment and 2% inflation.
In this updated blog, we leverage insights from S&P Capital IQ Pro to examine which industries and market factors tend to outperform during a rate-cutting cycle—and what that could mean for investors and businesses navigating the current environment.
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Top-Performing Industries When Rates Are Falling
1. Consumer Discretionary
- Lower rates result in increased disposable income for consumers and more affordable credit.
- Industries: Automobile Components, Automobiles, Hotels, Restaurants & Leisure, and Internet & Catalog Retail (historical GICS Industry)
2. Technology
- Growth-oriented companies benefit from lower discount rates on future earnings.
- Easier access to capital facilitates innovation and expansion.
- Industries: Biotechnology, Software
3. Real Estate
- Reduced mortgage rates encourage home buying and refinancing.
- Industries: Real Estate Management and Development
4. Industrials
- Infrastructure and capital goods companies benefit from increased business investment and government spending.
- Industries: Trading Companies, Building Products, Machinery
In low-interest rate environments, Growth Factors often outperform because their valuations are more sensitive to interest rates due to their future earnings potential—lower rates increase the present value of those future earnings. However, when interest rates are initially reduced, Value Factors tend to outperform. Below is a comprehensive list of the top-performing factors over the past 30 years, where the top-ranked quintile excelled for the S&P 500.
Over the past 30 years, during periods of Federal Reserve policy easing, the Growth Flow to Price ratio has consistently been the top-performing factor within the S&P 500. This metric is defined as the ratio of trailing four-quarter income before extraordinary items plus research and development (R&D) expenses, relative to the average market value of common equity over the same period. The inclusion of R&D expenses often results in a higher weighting for sectors such as Pharmaceuticals and Technology, which may contribute to the factor's outperformance. Below is a list of the top-ranked securities based on this factor.
Seamlessly integrate your portfolios into Capital IQ Pro’s Portfolio Analytics to analyze your exposure to these industries and factors at both the security level and portfolio level relative to your benchmark.
Additional Notes on Growth Flow to Price:
The role of R&D spending has been extensively studied in finance literature. Research indicates that announcements of increased research and development (R&D) spending often lead to positive price reactions, even when these announcements occur alongside earnings declines. Specifically, high-technology firms that announce increases in R&D spending generally experience positive abnormal returns, while low-technology firms may see negative abnormal returns. Furthermore, firms with R&D intensity higher than the industry average tend to see stock-price increases, but primarily in high-technology sectors.
Without the R&D component, the Growth Flow to Price factor closely resembles the earnings-to-price ratio, potentially leading to inappropriate comparisons. Therefore, it is advisable to construct this factor to include only companies with non-zero R&D spending, ensuring it effectively differentiates between companies based on their R&D investment levels.
References:
1. Chan, S.H., Martin, J.D., & Kensinger, J.W. (1990). Corporate Research and Development Expenditures and Share Value. Journal of Financial Economics.
2. Chan, L.K.C., Lakonishok, J., & Sougiannis, T. (2001). The Stock Market Valuation of Research and Development Expenditures. Journal of Finance.
3. Hall, B. (1993). The Stock Market's Valuation of R&D Investment During the 1980's. American Economic Review.
Jensen, M.C. (1993). The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems. Journal of Finance.