Fed’s October Rate Cut: "Equity-Gold Allocation" as the Optimal Strategy – Stock ETFs or Individual Stocks? Gold ETFs or Gold Stocks?

1. Introduction

TradingKey - Overbought technical conditions triggered profit-taking, driving the sharp declines in U.S. stocks on 10 October and gold on 21 and 27 October. Subsequently, expectations of more aggressive Federal Reserve rate cuts and sustained AI-driven optimism fuelled a U.S. stock market rebound to new highs, while deteriorating U.S.-Russia relations and waning U.S. dollar index momentum supported a stabilisation in gold prices.

Looking ahead, the Federal Reserve's interest rate meeting on 29 October will be a pivotal event shaping the trajectory of U.S. stocks and gold. The market widely anticipates a 25-basis-point rate cut, bringing the benchmark rate to 4%. We also project at least another 25-basis-point cut at the December meeting (Figure 1). In a sustained rate-cutting environment, we are bullish on both U.S. stocks and gold over the next 12 months. From an investment strategy perspective, equities are risk-on assets while gold serves as a safe-haven hedge, so allocating to both U.S. stocks and gold enables portfolio diversification and effective risk mitigation. Passive investors should buy broad-market ETFs such as SPY, QQQ, and GDX, whereas active investors can target leading companies in rate-sensitive sectors—including technology, real estate, and consumer discretionary—alongside major gold mining stocks like Newmont (NEM) and Barrick Gold (GOLD).

Figure 1: Fed Policy Rate (%)

Source: Refinitiv, TradingKey

2. U.S. Stock Market

2.1 Broad Market Outlook

While slowing economic growth poses challenges for U.S. stocks, the Federal Reserve's rate-cutting policy is expected to provide offsetting support. Rate-cut cycles can be categorised into two types: relief and preventive. Historical data from the past six rate-cut cycles show three were relief, typically triggered by economic recessions. During these periods, the negative impact of recessions often outweighed the positive effects of rate cuts, leading to stock market declines. The other three were preventive, implemented to address economic slowdowns rather than full recessions. In these cases, the positive effects of rate cuts generally surpassed the drag from slower growth, driving stock market gains (Figure 2). Looking forward, the U.S. economy is expected to remain resilient, with a soft landing being the most likely scenario. Thus, the current rate-cut cycle is likely to be preventive, yielding a net positive impact on the stock market.

Additionally, despite the ongoing U.S. government shutdown and delayed release of key economic data, the weak trend in the labour market is likely to persist in the short term. This scenario, combined with the newly released September CPI figure of 3% — which is below the widely expected 3.1% — suggests the Federal Reserve will maintain its monetary policy focus on the labour market. It is projected that by the middle of next year, the Fed’s interest rate cut efforts may exceed current market expectations. In turn, stronger monetary easing will further provide support for the rally in U.S. stocks.

Regarding fiscal policy, pre-Global Financial Crisis (GFC) U.S. government policies prioritised economic growth over market stability. However, the painful lesson from the failure to bail out Lehman Brothers, which exacerbated the crisis, led to a paradigm shift in policy. This is evident in the 2008 Troubled Asset Relief Program (TARP) and the 2020 Coronavirus Aid, Relief, and Economic Security Act (CARES), both reflecting a pivot toward market-supportive fiscal measures. Should U.S. stocks face another sharp decline, the government is likely to act as a "put option," with new fiscal stimulus promptly stabilising markets. Consequently, preventive rate cuts, domestic tax reductions, and fiscal backstops collectively underpin our optimistic outlook for U.S. stocks.

2.2 U.S. Stock Sectors and Individual Stocks

For passive investors, buying broad-market ETFs (such as SPY and QQQ) is a solid investment choice. For active investors, they may focus on interest rate-sensitive sectors like technology, real estate, and consumer discretionary. The following analysis is based on historical patterns and current market characteristics:

2.2.1 Tech Sector: The Core Driver of Valuation Expansion

Rate cuts directly lower the discount rate for future cash flows, significantly benefiting technology stocks that rely on high R&D investments and long-term earnings. The AI and semiconductor sectors are the primary winners, with NVIDIA (NVDA) leveraging its dominant position in AI chips to achieve amplified valuation elasticity in a loose liquidity environment. Cloud computing giants like Microsoft (MSFT) and Alphabet (GOOGL) are poised to gain from increased corporate digitalisation spending and lower financing costs, supporting a clear dual uplift in earnings and valuations. Looking ahead, with the AI boom combined with preventive rate cuts, the probability of outperformance for Nasdaq components is notably higher than for the S&P 500 index.

2.2.2 Real Estate and REITs: Easing Financing Pressures and Recovering Demand

Declining mortgage rates are expected to stimulate housing demand, with homebuilders like Lennar (LEN) and D.R. Horton (DHI) likely to see signs of rising order volumes. The REIT sector also presents strong potential, with companies such as Prologis (PLD) and Digital Realty (DLR) benefiting from reduced financing costs, which ease expansion pressures, and stable dividends that become increasingly attractive as U.S. Treasury yields decline. Historical data indicate that during rate-cut periods, these assets typically outperform the broader market.

2.2.3 Consumer Discretionary and High-Debt Industries: Significant Boost to Demand

Rate cuts alleviate household credit pressures, directly benefiting the automotive and retail sectors. Companies like Tesla (TSLA) and General Motors (GM) are poised to capitalise on lower financing costs for vehicle purchases, reinforced by the ongoing transition to electric vehicles, which enhances sales growth certainty. Retail giants such as Amazon (AMZN) and Home Depot (HD) will likely see gains from restored consumer confidence and a rebound in durable goods spending. In high-debt sectors, companies like American Airlines (AAL) in aviation and AT&T (T) in telecommunications benefit from reduced interest expenses, creating substantial room for earnings improvement.

Figure 2: S&P 500 Performance During Rate-Cut Cycles

Source: Refinitiv, TradingKey

3. Gold

3.1 Market Liquidity

In addition to U.S. stocks, gold is another asset class worth allocating to against the backdrop of interest rate cuts. The Federal Reserve’s rate cuts influence gold prices primarily through two channels: enhancing market liquidity and suppressing real interest rates. Gold, with its dual characteristics as a safe-haven asset and a non-yielding investment, has a price trajectory closely tied to changes in market liquidity. Market liquidity, which reflects the degree of monetary policy easing or tightening and the abundance of capital within the economic system, directly shapes investors’ allocation decisions toward assets like gold.

When market liquidity becomes significantly abundant, such as during substantial Federal Reserve rate cuts or the implementation of quantitative easing, the money supply increases, and the cost of capital decreases. This loose monetary environment typically drives rising inflation expectations, as excess liquidity may lead to higher price levels. In this context, investors often increase their gold holdings to hedge against inflation risks and currency depreciation pressures, directly boosting gold demand. This, in turn, supports gold prices and may even trigger significant upward price movements.

During the 2020 global pandemic, central banks, particularly in the U.S., aggressively cut interest rates and relaunched quantitative easing policies. In August of that year, gold prices surged past the critical $2,000 per ounce threshold, reaching the highest level since 2011. In summary, market liquidity significantly influences gold prices through its impact on monetary policy, capital flows, and investor sentiment, with this effect becoming particularly pronounced in environments marked by heightened economic uncertainty.

3.2 Real Interest Rates

As previously noted, gold is a non-yielding asset, and its market appeal is largely determined by its relative yield compared to other investment assets, particularly fixed-income securities like bonds. Real interest rates, calculated as nominal interest rates minus inflation, serve as a critical indicator of the true return on fixed-income assets and have a significant impact on gold price trends.

When real interest rates decline, the yields on fixed-income assets like bonds decrease, and investors’ expectations for returns weaken accordingly. In this environment, the opportunity cost of holding gold drops significantly, enhancing its appeal as a safe-haven asset and an inflation hedge. This attractiveness becomes particularly pronounced when real interest rates turn negative, as gold not only serves as an effective hedge against inflation but also offers the potential for capital appreciation. Consequently, investors are more likely to increase their gold holdings, driving up demand and providing support for gold prices, potentially sparking an upward trend.

Taking the period from September to December 2024 as an example, the Federal Reserve cut its benchmark interest rate from 5% to 4.5%. This led to a decline in short-term Treasury yields, boosting investors’ appetite for gold allocation. This trend further drove increased demand for gold and an upward movement in its price. During this period, gold prices rose from approximately $2,493 per ounce to $2,718 per ounce, marking a gain of over 9%.

3.3 Individual Gold Stocks

In addition to gold ETFs, such as GDX, investors can also choose individual gold stocks to benefit from rising gold prices. Leading mining companies such as Newmont (NEM) and Barrick Gold (GOLD) directly reap the rewards of price increases. During past preventive rate-cut cycles, the gold sector and related stocks have typically seen significant gains. Amid current geopolitical risks and loose monetary conditions, gold’s defensive value is increasingly prominent.

4. Conclusion

All in all, despite signs of rising U.S. inflation, the Federal Reserve continues to prioritise a weakening labour market as a key factor in shaping current monetary policy, ensuring the persistence of the rate-cut cycle. Supported by preventive rate cuts and tax reduction policies, U.S. stocks are expected to continue reaching new highs. We are equally optimistic about gold’s outlook due to two main factors: first, sustained rate cuts will enhance market liquidity, and second, they will suppress real interest rates.

From an investment strategy perspective, given that stocks are risk assets while gold offers natural safe-haven properties, allocating to both enables investors to achieve portfolio diversification and effective risk hedging. Passive investors should buy broad-market ETFs such as SPY, QQQ, and GDX, whereas active investors can target leading companies in rate-sensitive sectors—including technology, real estate, and consumer discretionary—alongside major gold mining stocks like Newmont (NEM) and Barrick Gold (GOLD).