Who benefits the most from rate cuts?

Investing.com -- Higher-for-longer interest rates have defined market leadership in recent years, but signs of softening inflation and payrolls data have shifted expectations.

According to Piper Sandler, July’s tame CPI print, alongside a weaker jobs report and calls for a 50-basis-point rate cut in September, have driven investors to price in “>90% odds on a rate cut in September and are expecting more than two cuts by year end.”

The most obvious beneficiaries are small-cap companies, which have been disproportionately hit by elevated borrowing costs. Small businesses are still paying very high rates even on short-term loans, underscoring the pressure they face.

“Small caps tend to pay high rates and they have a lot of debt for their size,” strategists led by Michael Kantrowitz wrote, adding that interest expenses consume a large share of earnings, leaving them highly sensitive to rate changes.

A sustained decline in borrowing costs “would be a welcome reprieve for the small cap space.”

But the sensitivity extends beyond small caps. Stocks with higher debt burdens across all size and style cohorts remain the most exposed.

Strategists point out that since the 2022 spike in yields, “stocks with high interest coverage have steadily outperformed,” while heavily leveraged companies lagged. The effect has been most pronounced in small caps, underscoring their vulnerability to higher rates and potential rebound if yields fall.

To identify likely winners, Piper Sandler screened for names most negatively correlated with the 10-year Treasury yield. The list spans sectors, with technology, consumer discretionary, and financials heavily represented.

Companies such as ServiceNow (NYSE:NOW), DocuSign (NASDAQ:DOCU), Okta (NASDAQ:OKTA), Autodesk (NASDAQ:ADSK), and NVIDIA (NASDAQ:NVDA) appear among the top 50.

Consumer-facing firms like Amazon (NASDAQ:AMZN), eBay (NASDAQ:EBAY), Netflix (NASDAQ:NFLX), and Chewy (NYSE:CHWY) also feature prominently, alongside financials including PayPal (NASDAQ:PYPL), BlackRock (NYSE:BLK), and S&P Global Inc (NYSE:SPGI).

Healthcare and industrial names are also present. Amedisys (NASDAQ:AMED), Intuitive Surgical (NASDAQ:ISRG), and Tandem Diabetes Care (NASDAQ:TNDM) rank among the most negatively correlated, while Vicor (NASDAQ:VICR), Generac Holdings (NYSE:GNRC), and Proto Labs (NYSE:PRLB) lead the industrials.

Materials and real estate exposure is seen in Newmont Goldcorp (NYSE:NEM), Sherwin-Williams (NYSE:SHW), and Digital Realty (NYSE:DLR) Trust.

The inverse also holds true. Energy and industrial stocks dominate the group most positively correlated with yields, meaning they are likely to underperform if rates decline.

Marathon Petroleum (NYSE:MPC), Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), Valero Energy Corporation (NYSE:VLO), Schlumberger (NYSE:SLB), and ConocoPhillips (NYSE:COP) stand out as among the most vulnerable to falling yields. Financials such as Principal Financial Group (NASDAQ:PFG) and Aflac (NYSE:AFL) also show high positive correlations.

Overall, the report highlights a stark divide. Rate-sensitive small caps and debt-heavy names stand to gain the most from a shift in monetary policy, while yield-linked sectors like energy and insurers could lose ground.

With markets now braced for cuts, positioning hinges on which side of that divide investors believe will define the next phase of market leadership.