The Federal Reserve surprised markets earlier this month when it cut interest rates by 50 basis points , signaling a shift toward preserving economic growth. The move prompted Wall Street giants Barclays and Citi to adopt a more optimistic stance on global cyclical stocks. Cyclical stocks are generally sensitive to interest rates and economic growth, rising as financial conditions ease and the economy expands. Barclays believes the Federal Reserve’s actions are “clearly designed to pull out all the stops to achieve a soft landing” for the economy. “Time will tell, but with incoming data holding up, a soft landing stays on track,” said Barclays equity strategist Emmanuel Cau in a note to clients titled “Don’t fight the Fed, don’t short Cyclicals” on Sept. 20. The concept of “don’t fight the Fed” — a long-standing Wall Street adage advising investors to align their strategies with the central bank policies — dominated in the decade after the global financial crisis as stocks rallied despite economic concerns and the central bank keeping interest rates low. Barclays strategists noted that “cyclicals typically rebounded steadily after the Fed started its rate cut cycle … as long as it was not followed by a recession.” Citi strategists share a similar outlook for European stocks. “Alongside Fed cuts and ‘soft landing’ hopes, this suggests we could be approaching the right time to start averaging into select oversold Cyclicals,” said Citi strategists led by Beata Manthey in a note to clients on Sept. 20. The strategists said their proprietary gauge which measures market trends — the Earnings Revisions Index — was flashing “extreme” readings. This has historically been a contrarian indicator and often precedes the outperformance of cyclical stocks over the following 12 months, they added. “The scale of the downgrades has become so extreme of late that we’re now approaching a point where negative ERI may be a useful contrarian indicator,” the Citi strategists said. The Wall Street bank screened for Buy-rated stocks that have had their forward valuation ratios fall since the end of the first half of this year, but consensus earnings forecasts have improved over the last month. The screened stocks include Siemens , Safran , BBVA , ING , Holcim , Atlas Copco and ASM among others. Most of the bank’s picks are also traded in the United States. — CNBC’s Michael Bloom contributed reporting.
