Who Won the U.S. Presidential Debate?

As the Federal Reserve transitions from a restrictive monetary policy to a more accommodative stance, investors are questioning how this regime change will impact various asset classes.

The central bank’s shift towards lower interest rates can have far-reaching implications across equities, bonds, and other markets.

Historically, stocks have tended to perform well following the Fed’s initial rate cuts—but with a crucial caveat: the economy must avoid slipping into a recession. An analysis by Goldman Sachs reveals that the S&P 500 has experienced significant declines even after rate cuts if the U.S. economy entered a recession during those periods.

When it comes to bonds, lower interest rates have generally led to a decrease in bond yields, thus driving up bond prices. Unlike equities, this dynamic has historically played out somewhat independently of the economic cycle. However, “what's past is prologue” is not always a guarantee in financial markets.

‘Quality Can Be Found Across Asset Classes’

According to Bank of America’s latest Research Investment Committee (RIC) report, investors can identify quality opportunities across various asset classes, particularly in today’s shifting market landscape.

BofA analysts suggest that in the U.S. equity space, investors should adopt a defensive stance, focusing on companies with high free cash flow.

Savita Subramanian, head of U.S. equity & quantitative strategy at BofA, notes that S&P 500 valuations indicate low price returns for the next decade, making dividend payouts more crucial for total returns.

Utilities : Recently upgraded to Overweight by BofA, the utilities sector stands out for its defensive characteristics and competitive yield. Subramanian indicates that growing power demand driven by AI-linked data centers bolsters the outlook for utility companies. ETFs like the First Trust Utilities AlphaDEX ETF FXU and the Utilities Select Sector SPDR Fund XLU are potential plays in this space.

: Recently upgraded to Overweight by BofA, the utilities sector stands out for its defensive characteristics and competitive yield. Subramanian indicates that growing power demand driven by AI-linked data centers bolsters the outlook for utility companies. ETFs like the and the are potential plays in this space. Real Estate : Offering higher quality yield than before, with 70% of the sector rated B+ or better, the real estate sector provides attractive options. BofA notes that the S&P 500 real estate segment has relatively low office exposure, which could mitigate some risks. Recommended ETFs include the Real Estate Select Sector SPDR Fund XLRE and iShares Cohen & Steers REIT ETF ICF .

: Offering higher quality yield than before, with 70% of the sector rated B+ or better, the real estate sector provides attractive options. BofA notes that the S&P 500 real estate segment has relatively low office exposure, which could mitigate some risks. Recommended ETFs include the and . Consumer Staples : BofA finds the consumer staples sector tactically attractive, especially ETFs like the Consumer Staples Select Sector SPDR ETF XLP , which has substantial exposure to resilient companies like The Procter & Gamble Co. PG , Costco Wholesale Corp. COST , Walmart Inc . WMT . Another sector play here is the iShares U.S. Consumer Staples ETF IYK .

: BofA finds the consumer staples sector tactically attractive, especially ETFs like the , which has substantial exposure to resilient companies like , , . . Another sector play here is the . Value, Quality, Dividends, and Buybacks: The bank is also bullish on factor-based ETFs, recommending exposure in value, quality, dividend, and buyback amid a strong free cash flow yield and potential for higher payouts than the broader S&P 500 index. ETFs in this category include the Vanguard Value ETF VTV , Pacer US Cash Cows 100 ETF COWZ , Schwab US Dividend Equity ETF SCHD , and iShares Core Dividend ETF DIVB .

Outside the U.S., Bank of America is bullish on Japanese equities as effective corporate reforms are expected “to unleash a mountain of cash.” The WisdomTree Japan Hedged Equity ETF DXJ is a top pick in this market, having gained 125% since 2019. This ETF also offers protection against the yen’s devaluation.

In the fixed-income market, BofA suggests exposure to AAA-rated collateralized loan obligations (CLOs) and long-dated Treasury bonds.

CLOs : BofA recommends the Janus Henderson AAA CLO ETF JAAA , viewing these loans as quality yield options that have withstood stress during both the 2008 financial crisis and the 2020 pandemic-induced downturn.

: BofA recommends the , viewing these loans as quality yield options that have withstood stress during both the 2008 financial crisis and the 2020 pandemic-induced downturn. Long-Dated Treasuries: Investors looking for duration exposure can consider the iShares 20+ Year Treasury Bond ETF TLT , which tracks long-dated Treasury bonds with a 17-year duration.

Asset Class Name Equities Utilities First Trust Utilities AlphaDEX ETF Utilities Utilities Select Sector SPDR Fund Real Estate Real Estate Select Sector SPDR Fund Real estate iShares Cohen & Steers REIT ETF Consumer staples Consumer Staples Select Sector SPDR ETF Consumer staples iShares U.S. Consumer Staples ETF Value Vanguard Value ETF Quality Pacer US Cash Cows 100 ETF Dividend Schwab US Dividend Equity ETF Buybacks iShares Core Dividend ETF Japan Wisdom Tree Japan Hedged Equity ETF Fixed income Credit Janus Henderson AAA CLO ETF Duration iShares 20+ Year Treasury Bond ETF

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