U.S. soft landing hopes lift infrastructure, energy stocks

(Gettyimagesbank)

Investors’ attention should be given infrastructure and energy sectors and small-cap stocks as they could see positive momentum in the near future, according to a South Korean investment management firm on Sunday.

Maeil Business Newspaper asked investment advisory firm Regnum Capital Management to predict future market conditions following the U.S. Federal Reserve’s decision to lower its benchmark lending rate by 0.5 percentage point in September.

The management firm predicted that the U.S. economy is on a path toward a soft landing, with the stock market expected to follow a steady upward trajectory.

The firm’s analysis suggests that the Federal Reserve’s decision to cut rates was not a response to economic recession, but rather a proactive “insurance” measure to prevent a slowdown.

“The last time we saw a rate cut of 50 basis points during a policy cycle was during recessionary periods like the dot-com bubble in 2001, the global financial crisis in 2007, and the Covid-19 pandemic in 2020,” said Gregory Lee, CEO of Regnum Capital Management.

“However, this situation is different as the U.S. is currently seeing robust GDP growth and a stable financial system.”

Federal Reserve Chair Jerome Powell has also expressed optimism about the U.S. economy and has shown a commitment to closely monitoring the labor market, making the insurance rate cut a potential boon for capital markets.

Based on historical data, when insurance rate cuts occurred during periods of soft landings, stock markets saw moderate gains.

According to Regnum’s analysis, past rate cuts in 1984, 1989, and 1995 led to an average S&P 500 return of 16.1 percent.

With positive corporate earnings trends and expectations of increased government spending and private investment following the rate cut, similar stock market performance is anticipated.

Among U.S. exchange-traded funds (ETFs), infrastructure-related stocks stand out as particularly promising.

The passage of several major U.S. legislative packages, including the Infrastructure Investment and Jobs Act, the Inflation Reduction Act, and the CHIPS Act, totaling $4.2 trillion in government spending, has spurred a surge in manufacturing and construction spending.

One example is the First Trust NASDAQ Clean Energy Edge Smart Grid Infrastructure Index Fund (GRID), which posted a 38.49 percent return over the past year.

Energy stocks are also worth watching, particularly following a September meeting between White House officials and top AI industry CEOs, where they discussed expanding energy infrastructure to meet the rising electricity demands driven by advancements in AI technology.

OpenAI CEO Sam Altman and others emphasized the need for a robust energy infrastructure to support the growing AI industry.

“The U.S. is exploring strategic national investments to strengthen its leadership in AI, which could lead to significant energy infrastructure investments, including nuclear power,” said Lee.

Small-cap stocks and real estate investment trusts (REITs) are also expected to benefit from the rate cut and a potential soft landing.

These sectors typically perform well when interest rates fall and the economy stabilizes.

However, despite recent gains in U.S. stocks linked to Chinese markets following China’s economic stimulus efforts, experts urge caution when investing in such assets.

“China’s recent government actions appear to be short-term solutions aimed at boosting stock prices rather than addressing structural economic issues,” Lee said.