Small-cap stocks and homebuilders could face the greatest downside if the Federal Reserve signals a hawkish stance at this week’s Jackson Hole symposium, according to Barclays.
Barclays’ economists continue to take a contrarian view, expecting no rate cut in September.
“With some segments of the equity market having moved swiftly to reprice rates from ‘higher for longer’ to ‘lower and sooner’, we looked at potential vulnerabilities in the event of a hawkish surprise at the symposium,” the bank said.
The note highlighted trading activity after July’s inflation report, when “the futures-implied probability of a September rate cut spiked from 87% to over 100%.”
During that period, “small caps (especially small-cap value) and homebuilding stocks [were] the biggest perceived beneficiaries of an immediate rate cut, followed by banks and retail,” Barclays noted.
Although fundamentals for small caps have strengthened, the bank argued that much of their recent rally has been driven by expectations of looser monetary policy.
“We expect small caps (especially small-cap value) to be among the first to trade off if Fed messaging disappoints,” Barclays wrote.
Homebuilders also appear vulnerable. “Looking at GICS L4 sub-industry metrics, homebuilders look more vulnerable to a hawkish surprise than building products stocks,” the note added, explaining that higher interest rates tend to weigh more heavily on housing demand.
Banks may see volatility as well, though Barclays remains more positive. “We would view any sell-off in response to a hawkish surprise as a buying opportunity for the Financial sector, and we maintain our Positive view,” the analysts said.
The Jackson Hole symposium begins Thursday, with markets closely watching for any signals on future Fed policy.
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