Wall Street just got a fresh jolt of adrenaline, courtesy of the Federal Reserve’s hefty 0.50% rate cut. With the S&P 500 and Dow Jones Industrial Average soaring to new records, technology and consumer discretionary stocks are stealing the spotlight, as investors swap their caution tape for party hats in a celebration of economic optimism.

Global markets have been following suit, with gains seen across Asia and Europe. Hong Kong’s central bank also cut its policy rate this week, adding to the bullish sentiment, while the Bank of England kept rates steady as anticipated.

Is the euphoria on Wall Street overdone? Not yet. Robust corporate earnings growth is justifying elevated valuations. Stocks are expensive, but the good news is that they could remain so for quite some time. Underlying technical and fundamental indicators continue to get better.

You’d be wise to take advantage of sector rotation by increasing your exposure to cyclical stocks that were laggards during the Fed’s now-ended tightening cycle.

Meanwhile, the U.S. dollar is holding firm against major currencies. In commodities, both West Texas Intermediate (WTI) crude oil and gold are on an upward trajectory, underscoring broad market strength.

Jobless claims dropped to 219,000 in the week ending September 14, well below forecasts of 230,000 and marking the lowest level in four months. This decline in jobless claims offers further evidence that the labor market remains resilient.

Employers seem to be moderating hiring rather than resorting to widespread layoffs. This delicate balance reflects a gradually cooling labor market, exactly the kind of environment needed to achieve the much-coveted “soft landing” for the U.S. economy.

A soft landing occurs when the economy slows just enough to rein in inflation without tipping into a recession, which is ideal for investors.

The softening of the labor market could also result in slower wage growth, a key factor in taming inflation in the services sector. With less pressure on wages, the Fed would find it easier to continue easing monetary policy, helping support long-term economic growth.

The Fed on Wednesday reduced the fed funds rate to a target range of 4.75%-5.0%. Markets are now pricing in expectations of further rate reductions, forecasting that the fed funds rate could dip below 3.0% over the next year.

This shift comes as the Fed’s dual mandate of maximizing employment and stabilizing prices moves back into alignment. As the labor market cools and inflation moderates, the central bank has more room to cut rates.

Lower interest rates are manna from heaven for both businesses and consumers, reducing borrowing costs and spurring investment and spending. This environment—lower inflation, manageable unemployment, and reduced interest rates—creates a “Goldilocks” economy, where conditions are just right for continued economic growth without overheating or crashing.

A boost for small stocks…

The Russell 2000 index of smaller companies, which is more sensitive to the ups and downs of the economy, has been surging as well. The index currently hovers above its major moving averages, as reflected by the benchmark iShares Russell 2000 ETF (IWM). See the following chart (data as of market close Friday):

Small-cap stocks typically perform well when interest rates fall and economic growth accelerates.

Small-cap companies often rely more on external financing to fund growth and operations compared to large-cap firms. When interest rates decrease, borrowing becomes cheaper, allowing small businesses to finance expansion, invest in new projects, and enhance profitability.

Small-cap companies also tend to be more closely tied to domestic economic conditions because they often lack the global diversification of large firms. When the economy improves, small-cap businesses can experience more significant revenue and earnings growth, making their stocks more responsive to economic upturns.

When interest rates fall, safer assets like bonds offer lower returns, prompting investors to shift toward riskier assets like small-cap stocks, which typically provide higher growth potential. During periods of economic optimism, this “risk-on” behavior fuels demand for small-cap equities.

What’s more, in low-rate environments, large corporations with stronger balance sheets may seek to acquire smaller companies to capitalize on favorable borrowing conditions. This potential for mergers and acquisitions (M&A) often drives up the stock prices of small-cap companies.

Together, these factors create a favorable environment for small-cap stocks when interest rates fall and economic growth picks up.

A soft landing scenario, where the economy slows but avoids a recession, is essentially a dream outcome for the stock market. This environment typically results in a balanced economy—strong enough to support corporate profits but not so overheated that inflation surges out of control.

A soft landing isn’t just a possibility—it’s now a reality.

On Friday, the main U.S. stock market indices closed mostly lower as equities took a breather from their torrid run, but the Dow Jones Industrial Average nonetheless closed at a fresh record. The trading session’s final tally:

• DJIA: +0.09%
• S&P 500: -0.19%
• NASDAQ: -0.36%
• Russell 2000: -1.10%

The four major averages notched weekly gains. The benchmark 30-year U.S. Treasury yield slipped 0.02% to settle at 4.07%.

Editor’s Note: Amid the bullish but volatile conditions I’ve just described, are you looking for an alternative growth opportunity? I suggest you consider marijuana.

That’s right…marijuana. Weed is no longer a pariah and counter-cultural act of rebellion. It’s a multibillion-dollar bonanza. Investors who ignore pot stocks will miss out on huge, market-thumping gains.

Through painstaking research, my colleague Jim Pearce has discovered that a small group of everyday Americans are earning up to $51,338 a year from one company’s lucrative marijuana profit-sharing “plan.”

Jim is the chief investment strategist of our flagship publication, Personal Finance. He tells me that this particular company is the biggest win-win opportunity he’s ever seen in the marijuana market.

There’s one step you must take to qualify for the next round of payouts. To learn more, click here now.

---

John Persinos is the editorial director of Investing Daily. You can reach John via mailbag@investingdaily.com

Subscribe to John’s video channel by clicking this icon: