Fed Rate Cut Impact on Growth vs Value Stocks Analysis

A potential Federal Reserve rate cut would disproportionately benefit

over value stocks in the S&P 500, based on the fundamental mechanism of discounted cash flow valuation and historical precedent. However, the magnitude of outperformance depends critically on the economic context driving the rate cuts—whether it’s a crisis-driven flight to safety or a normalization cycle amid resilient economic growth [0][1].

Fed Governor Milan has suggested that the U.S. economy can afford lower interest rates given current conditions, including a strong labor market and moderating inflation [1]. This dovish stance, combined with the Fed’s current policy rate of 3.60% (down from the 5.25% peak in 2024), suggests further rate cuts of 25-60 basis points may be on the horizon for 2026 [1][2].

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Stock valuations are fundamentally based on discounted cash flow (DCF) analysis, where the stock price equals the sum of future cash flows discounted back to present value:

This mathematical relationship creates

between growth and value stocks:

Characteristic	Growth Stocks	Value Stocks
Value derivation from future cash flows	70-80% (5+ years out)	60-70% (0-3 years)
P/E sensitivity to 1% rate change	+15-25% expansion	+5-10% expansion
Duration risk	Very High	Moderate

Growth stocks derive a much larger proportion of their valuation from earnings that occur many years in the future. When discount rates fall, the present value of these distant cash flows increases dramatically—amplifying the benefit to growth stocks [2][3].

Growth companies typically fund expansion through:

• Debt financing
  for capital-intensive projects
• R&D investment
  for future competitive advantages
• Talent acquisition
  in competitive markets

Lower interest rates reduce borrowing costs across the board, but the relative impact is greater for growth companies that are actively deploying capital for expansion. This is particularly significant for unprofitable or low-profitability growth stocks that rely on cheap capital to fund operations [3].

When the Fed cuts rates:

• Bond yields decline, making fixed-income less attractive
• The spread between equity earnings yields (E/P) and bond yields widens
• Higher-beta growth stocks capture disproportionate benefit from the resulting capital flows into equities [2][3]

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Analysis of four major Federal Reserve easing cycles reveals a nuanced pattern:

Metric	Value
Fed Rate Change	6.5% → 1.0% (550 bps)
Growth Outperformance	+15.2% relative to value
Context	Post-bubble valuations became extremely attractive

Following the tech crash, growth stocks rebounded faster once rates fell sufficiently to make their valuations compelling [2][3].

Metric	Value
Fed Rate Change	5.25% → 0.25% (500 bps)
Growth Underperformance	-8.5% relative to value
Context	Flight to safety dominated investor behavior

During crisis-driven cuts, value stocks outperformed as investors sought stability and perceived safety [2].

Metric	Value
Fed Rate Change	2.25% → 0.25% (200 bps)
Growth Outperformance	+28.4% relative to value
Context	Remote work acceleration fueled tech demand

When secular growth trends align with rate cuts (tech enabling remote work), growth can dramatically outperform [2].

Metric	Value
Fed Rate Change (to date)	5.25% → 3.6% (165 bps)
Technology Sector Return	+28.3% YTD
Value Sector Return	+12.1% YTD
Context	AI-driven productivity revolution

The cycle remains ongoing, but growth is currently winning, driven by artificial intelligence adoption [1][2].

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Based on recent Fed communications and market pricing:

Period	Projected Rate	Probability
Current (Feb 2026)	3.60%	100%
March 2026 FOMC	3.50%	65%
June 2026	3.25%	45%
Year-End 2026	3.00%	35%

The Fed held rates steady at the January 2026 FOMC meeting, with officials debating whether policy remains restrictive or has reached “neutral” territory [1][2].

Recent trading session data reveals an interesting divergence [0]:

• Consumer Defensive: +2.03%
• Utilities: +0.40%
• Basic Materials: +0.05%

• Consumer Cyclical: -2.88%
• Financial Services: -2.82%
• Technology: -2.54%

The current defensive rotation may indicate short-term profit-taking in growth names ahead of anticipated further rate cuts [1].

Index	5-Day Performance	Interpretation
S&P 500 (^GSPC)	-1.79% to 6,832	Minor pullback in broad market
Nasdaq (^IXIC)	-2.36% to 22,597	Growth-heavy index underperforming
Russell 2000 (^RUT)	-2.58%	Small caps lagging

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Using a simplified DCF model:

Discount Rate	Growth P/E	Value P/E	Spread
14% (High)	28.6x	12.8x	15.8x
12% (Current)	34.0x	15.4x	18.6x
10% (Lower)	40.0x	18.0x	22.0x

A 200 basis point reduction in the discount rate expands the growth-value valuation spread by approximately 40%, creating favorable conditions for growth relative outperformance [2][3].

Scenario	10-Year Treasury	S&P 500 E/Yield	Spread
Current (5% Fed)	4.5%	5.5%	+100 bps
Projected (3% Fed)	3.5%	5.5%	+200 bps

The widening earnings yield spread strongly favors equities, with growth stocks capturing disproportionate benefit due to their higher beta characteristics [3].

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• ✓ Rate cuts typically expand growth P/E multiples by 15-25%
• ✓ AI/technology leaders benefit from lower discount rates
• ✓ Cost of capital reduction aids fundamentals
• ✓ Historical cycles suggest strong early-cycle performance

• ✗ Growth valuations are already elevated
• ✗ Limited multiple expansion potential from current levels
• ✗ Vulnerability if rates stabilize or rise unexpectedly

• ✓ Dividend yield becomes less competitive but provides income stability
• ✓ Cyclical value benefits from economic growth acceleration
• ✓ Offers downside protection if growth disappoints
• ✓ Historically outperforms during crisis-driven cuts

• ✗ Underperformance likely in early rate cut cycle
• ✗ Limited capital appreciation potential

Cycle Phase	Recommended Allocation	Rationale
Early (0-6 months post-cut)	Overweight Growth (65/35)	Maximum discount rate benefit
Mid-Cycle	Balanced (55/45)	Normalization begins
Late Cycle	Overweight Value (40/60)	Economic peak approaching
Current Positioning	Moderately Overweight Growth (60/40)	Mid-cycle, AI tailwind intact

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1. Inflation Resurgence:
   Could force Fed to pause or reverse cuts, disproportionately hurting growth valuations [1][2]

2. Economic Recession:
   Would trigger flight to value (as in 2008) and crisis-driven risk aversion

3. Valuation Extremes:
   Growth P/Es at elevated levels may limit upside from further multiple expansion

4. Dollar Weakness:
   Rate cuts may weaken the dollar, benefiting multinational growth companies but creating currency headwinds

5. Policy Uncertainty:
   The upcoming Fed chair transition (Kevin Warsh nomination) adds uncertainty to the policy path [2]

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Based on the theoretical framework and historical evidence:

1. Growth stocks are structurally positioned to outperform
   during Fed rate cut cycles due to their higher sensitivity to discount rates and greater reliance on future earnings

2. The magnitude of outperformance depends critically on context:
   • Crisis-driven cuts (2008): Value wins due to flight to safety
   • Normalization cycles (2001-2003, 2019-2020, 2024-2026): Growth tends to win

3. The current environment favors growth:
   The AI-driven productivity revolution creates a secular growth tailwind that aligns with the rate cut cycle, similar to the 2019-2020 tech-enabled growth acceleration

4. Prudent diversification remains warranted:
   Given uncertainty about the ultimate policy path, economic resilience, and geopolitical risks, a moderately overweight growth allocation with quality constraints is recommended

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[0] Ginlix API Data - Market indices, sector performance, and OHLCV data

[1] KuCoin News - “Fed Governor Resignation 2026 Rate Cut Outlook” (https://www.kucoin.com/news/articles/fed-governor-milan-resignation-white-house-economic-advisor-shift-2026-rate-cut-expectations-impact)

[2] Euronews - “Federal Reserve keeps interest rates unchanged in defiance of Trump” (https://www.euronews.com/business/2026/01/28/federal-reserve-keeps-interest-rates-unchanged-in-defiance-of-trump-who-wants-them-lowered)

[3] Investopedia - “How Interest Rates Impact Stock Market Trends” (https://www.investopedia.com/investing/how-interest-rates-affect-stock-market/)

[4] Invesco US - “Time to consider value?” (https://www.invesco.com/us/en/insights/time-to-consider-value-stocks.html)

[5] Seeking Alpha - Market analysis articles and sector performance data (https://seekingalpha.com)