Is the 2025 Fed Cut Rally Sustainable? Pro Playbook

How the pros are treating the 2025 cut rally

Everyone loves a post-cut pop until the earnings math shows up with a spreadsheet and a bad mood. The disciplined crowd isn’t chasing green candles; they’re re-underwriting earnings, reassessing duration, and letting positioning, not adrenaline, set risk. And yes, it’s a buzzkill. That’s the point. The rally might stick, but it needs a sustainability check before you size it like a new bull market.

Here’s the frame the pros are using right now: map the move to fundamentals, not headlines. Historically, when policy eases, prices often jump first and cash flows follow later, if they follow at all. Since 1970, S&P 500 earnings have fallen about 15-20% peak-to-trough in typical recessions (long-run history; ranges are wide). That’s the base case they test against. They’ll haircut margin assumptions, push out revenue growth by a couple quarters, and ask the blunt question: if 2026 EPS comes in 10-15% light versus rosy sell-side numbers, does this valuation still clear your hurdle rate? If the answer is “only if multiple expansion bails me out,” they cut risk. Simple as that.

On credit, they start with spreads, not vibes. ICE BofA long-run medians are roughly ~140 bps for investment grade OAS and ~500 bps for high yield OAS (long-term series data). If you’re inside those levels after a relief rally, you’re not getting paid for a bumpier macro tape. A 50 bps move wider in HY can erase multiple quarters of carry, ask anyone who learned that the hard way in 2022. And just to be clear, I’m not saying spreads must gap out. I’m saying the compensation for risk has to pencil when the music slows, not just when the DJ’s warming up the room.

Duration is the other lever. Pros extend it selectively, not all at once. Bond math 101: price change ≈ duration × yield change. So a 1% move in yield on an 8-year duration asset is roughly an 8% price swing. They’ll ladder into intermediate paper where the roll-down is real and leave room to add if term premium decompresses. In equities, they “extend duration” by rotating toward cash-generative compounders with earnings duration they can underwrite, not just high beta because it’s working this week. And I’ll circle back on this because it’s easy to miss: duration isn’t only a bond thing, it’s business-model duration too.

What you’ll learn in this section (and what the pros actually do):

• They map the rally to fundamentals, not headlines: re-underwrite 2025-2026 EPS with downside cases and sanity-check multiples against an equity risk premium that averages ~3-3.5% over long history.
• They size risk with earnings durability and credit spreads: if HY OAS is hugging the low-400s while earnings revisions roll over, they shrink position sizes. If IG pays you near long-run medians, they’ll add, patiently.
• They extend duration selectively: add in clips, prefer belly of the curve, avoid piling into the long end if term premium looks jumpy.
• They keep dry powder for drawdowns, not for FOMO: cash and T-bills are optionality, not dead weight. You want to buy weakness with intent, not chase strength out of boredom.

Look, there are gray areas. The path from policy easing to profits isn’t linear, and the macro tape can make fools of all of us for weeks at a time. But the disciplined playbook is boring on purpose: re-underwrite, re-price, re-size. If the rally can pass that test, great, scale into it. If not, keep your powder dry and your ego quieter than your stop-loss. And yeah, I’ve learned that one the expensive way.

What actually changed in 2025: rates, curve, liquidity

Mechanically, this year policy moved from holding to cutting. The Fed kept the target range parked at 5.25%-5.50% for all of last year, then in 2025 began easing, taking the top of the range off that peak and signaling they’re now managing downside growth and inflation symmetry rather than just inflation risk. That’s not numerology; it’s the shift in reaction function that matters for multiples and credit. Financial conditions eased, rate vol cooled, high-grade primary stayed open, HY windows didn’t slam shut on the first wobble. When the front end comes down, discount rates ease, and cash stops paying you 5%-plus for doing nothing. That resets behavior.

On the curve, the re-steepening finally has some teeth. The inversion that punished banks and cyclicals in 2023-2024 is less severe in 2025 as the front end leads lower. That helps net interest margins, helps credit creation at the margin, and, critically, pressures long-duration equity valuations a bit less than we saw back in late-2023 when the 10-year spiked and term premium went jumpy. Put simply: front-end relief + steadier long end = less valuation headwind for quality growth, and a relative tailwind for cyclicals that need curve slope to breathe.

Liquidity improved too, not in a fireworks way, more in a steady drip. Remember, the Fed already slowed QT last year: in June 2024 they reduced the monthly U.S. Treasury runoff cap from $60B to $25B while keeping the MBS cap at $35B. That change carried into 2025 and helped reserve balances stabilize instead of grinding down. At the same time, Treasury supply dynamics matter: coupon auction sizes stabilized versus the step-ups we lived through in 2H23 and into 2024, which kept the term premium from re-flaring. You don’t need to model every CUSIP to get the point, less forced duration absorption supports equity multiples at the margin.

More conversationally, because this is how people actually allocate, front-end yields drifting lower forces a reset. T-bills were optionality at 5%+. Now, with the policy path easing in 2025, cash stops being the hero trade. That pushes real money and retail alike a notch out the curve and a notch out the risk spectrum: IG over bills, some belly duration over floating, and yes, a willingness to buy equity dips instead of just clipping money market coupons. If you feel that tug, you’re not alone… I’ve moved a few rungs myself, grudgingly.

There’s a credit angle that’s worth repeating because positioning is the whole game. If HY OAS is hugging the low-400s while earnings revisions wobble, you don’t chase, you resize risk. If IG compensates you near long-run medians, you add patiently. The 2025 mix of easier policy, a less-inverted curve, and friendlier liquidity is constructive, but it’s not a hall pass. Term premium still lives in the long end, and Treasury’s quarterly refunding still sets the tone for that premium and, by extension, equity multiples. Keep one eye on the Fed’s pace of cuts, one eye on QT run-off mechanics, and both eyes on supply.

Quick anchors: Fed peak policy rate was 5.25%-5.50% in 2023-2024; QT caps were $60B UST and $35B MBS per month before the June 2024 slowdown to $25B UST. HY spreads near the low-400s bps = tight. Those are the levers moving multiples and credit this year.

Can earnings carry the load, or are we just re-rating?

Short answer: both, but the mix matters. The market can sprint on multiple expansion for a while when the discount rate falls and liquidity feels easier, we’ve all seen that movie, but durable rallies usually need forward EPS to rise alongside the multiple. Otherwise price is basically hope with a ticker. And with the policy setup we walked through, Fed peak 5.25%-5.50% in 2023-2024, QT caps trimmed to $25B UST per month since June 2024, and HY spreads hanging near the low-400s bps, multiples have had a tailwind that isn’t exactly a secret.

Margins are the fulcrum. Yes, revenue growth helps, but in late-cycle-ish phases the swing factor is costs versus output. Unit labor costs versus productivity is the whole ballgame for operating use. If productivity growth holds up while wage growth cools a notch, margins can expand without pricing gymnastics; if not, you need pricing power, and that’s getting patchy. I know, obvious, but we forget this when price is green for three weeks straight and our brains start anchoring to the last print.

On pricing power, it’s a split screen. The megacap platforms, where network effects, AI inference spend, and subscription bundles create stickiness, still push through price and mix without cratering churn. Mid-cap industrials and a chunk of consumer durables, very different story: backlogs normalized, freight surcharges rolled off, and customer procurement has teeth again. You see it in quote activity and win rates, solid volumes, less price. That’s fine in a soft-landing tape if productivity bails you out, but it caps the multiple on anything that can’t prove incremental margins above, say, 20-25% on new revenue.

Where my enthusiasm jumps, probably too much coffee, is on companies translating AI opex into real unit cost saves, not just revenue theater. When inference reduces customer support minutes per ticket or shortens engineering cycles, that’s productivity, that’s COGS and SG&A per unit falling, and that supports both EPS and the multiple. When it’s just another pilot that never exits the sandbox, you’re paying for a press release.

Revisions are the tell. One-off beats don’t change the investment case, revision trend does. Watch the 2025-2026 EPS paths across sectors, not the quarter-to-quarter noise. If we’re going to extend this rally without a rates relapse, we need forward EPS to grind higher into year-end and then again during Q1 seasonality. I’m not married to a single number, I’m married to the slope.

• Sustainable rallies pair multiple expansion with rising forward EPS: if the P/E re-rates on the back of lower term premium while the 12-24M EPS rises, you’ve got foundation instead of foam.
• Margins hinge on unit labor costs vs. productivity: wage deceleration + efficiency gains = operating use; the reverse = guidance haircuts.
• Pricing power is fragmenting: megacaps still set price; mid-cap industrials and parts of staples are price-takers again. Mixed tape.
• Follow 2025-2026 revisions, not just beats: breadth of upward revisions across sectors is healthier than a narrow handful of mega-caps pulling the index average.

One more practical note from the rates side because it feeds straight into equity math. With HY OAS near the low-400s bps, tight by any history, and IG hovering around long-run medians, the credit market is already pricing benign defaults and stable margins. That doesn’t doom equities, but it improving standards: you probably need confirmation from EPS to keep re-rating. If we get a wobble in revisions while Treasury’s quarterly refunding leans heavy on duration, term premium can reassert, cap the multiple, and suddenly we’re back arguing about 18x versus 20x instead of whether EPS is actually growing.

Anchors we’re using in this section: Fed peak policy rate at 5.25%-5.50% (2023-2024), QT UST runoff slowed to $25B/month since June 2024, and HY spreads near low-400s bps = tight. These are the levers still shaping multiples and the hurdle rate for earnings this year.

I’ll own my bias: I like rallies that pay you twice, some multiple, some earnings. When it’s only multiple, I resize; when revisions start trending up across 2025-2026, I add. Simple, maybe too simple, but after two decades on a desk, the simple stuff is what keeps you in the trade instead of explaining it on a panel after the drawdown.

Breadth, credit, and positioning: the durability checklist

When policy turns, I stop arguing narratives and start watching four dials. If the 2025 Fed-cut rally is going to be sustainable (yes, that exact “is-the-2025-fed-cut-rally-sustainable” question I keep getting on client calls ) breadth needs to broaden, credit needs to stay open, and positioning can’t already be max risk. Vol tells me how much air-cover I have. It’s not elegant, but it’s kept me out of a few fakeouts since 2008.

1) Breadth: advance-decline and equal-weight

• Advance-Decline: The NYSE advance-decline line turned up again in September and has been making higher lows into October. As of this week, roughly 65-70% of S&P 500 constituents are above their 50-day moving average and about ~60% above their 200-day. I might be off a point, but directionally it’s improving, which argues this isn’t just five mega-caps levitating the tape.
• Equal-weight confirmation: The RSP/SPY ratio has clawed back ~3-4% off the August lows, and equal-weight S&P is finally keeping pace. It’s not a full-on small-cap renaissance, but it says participation is widening. If this holds through month-end rebal, I give the move more credit.

2) Credit: HY/IG spreads as the “is funding open?” test

• High Yield: ICE BofA US HY OAS is sitting near the low-400s bps (call it ~420 bps in early October 2025 ) which is tight versus long-run averages. New issue windows are open, deals are getting done without big concessions. That’s the market telling you financing is available.
• Investment Grade: IG OAS has hovered around ~95-110 bps lately. Stable-to-tighter IG alongside tight HY is the combo I want to see. If we pushed toward 500-550 bps in HY in a hurry, I’d start cutting beta; we’re not there.

We’ve also still got QT running slower since June 2024 (UST runoff at ~$25B/month), and that’s helped term premium from running away on bad days. Credit doesn’t care about our narratives; it cares about funding. Right now, funding looks fine.

3) Positioning: fuel or fully loaded?

• Futures: CFTC data shows non-commercial positioning in S&P 500 e-minis net long, but not stretched, nowhere near the 90th percentile positioning you’d associate with crowded longs. Call it middle-of-the-road bullish.
• ETF flows: Equity ETFs have taken in solid cash again in Q3 and into October. The mix matters: broad beta funds saw steady inflows, and for the first time since last year’s wobble, small-cap ETFs printed back-to-back weekly inflows. It’s not 2021 frenzy; it’s consistent. Directionally positive, and importantly, still leaves room for incremental buying if earnings don’t disappoint.

4) Vol structure: how much downside is being paid for?

• Term structure: VIX futures curve is in contango; there’s roughly a 3-4 vol-point spread between front-month and 3-month. That’s a normal, healthy backdrop. If the front flips above the back, it usually means breadth and credit will confirm the stress pretty fast.
• Skew: Index put skew is off the extreme highs we saw during last year’s rate scares. Demand for crash protection has eased, which, net-net, tends to support carry and buybacks of downside hedges on dips.

Checklist read: breadth improving, credit tight/stable, positioning not maxed, vol in standard contango. That cocktail supports “stay with it,” with the caveat that earnings revisions can still yank the rug. If HY pops +100 bps or RSP rolls back over, I’ll resize. No heroics.

I know, it’s messy. Markets always are. But if these four keep trending the same way into November, I’m comfortable calling this more than a narrow pop, more all-weather than headline sugar high.

Portfolio moves that actually matter right now

Translate macro to money, here’s how I’m actually tilting into Q4. Big picture: if the “Fed-cut rally” is real, carry compresses and duration matters again. We don’t have to swing for the fences; small edges, stacked, usually win the year.

• Equities: Keep the beta modest and lean into quality growth and cash‑generative cyclicals. Think firms with ROIC above WACC by a clear margin, net cash or very manageable net debt, and pricing power that survived the last 24 months of inflation ping‑pong. I’m still fading “story stocks” with no free cash flow, nice narratives don’t pay dividends, cash flow does. A practical screen: positive FCF yield, stable gross margins, and 2025 EPS revisions not rolling over. If HY spreads widen +100 bps from here or equal‑weighted indices lose trend, I’ll ratchet down the cyclical sleeve. I’ve learned the hard way not to argue with credit.
• Bonds: Extend duration, but in steps. Ladder into 5-10 year Treasuries or high‑quality IG at 25-33% clips over the quarter. A barbell has worked for me: top‑tier IG (A/AA) for ballast and selective BBBs where spread still compensates for downgrade risk. For context, ICE BofA IG OAS hovered around ~100-110 bps in late 2024, while HY was ~350-400 bps, tight, but not “can’t move tighter” tight. If we get any Q4 backup in yields on a hot print, that’s where I add the next slug.
• Cash: Keep a T‑bill ladder (1-6 months), but mentally accept lower carry as policy eases into 2026. As a reference point, so we’re not guessing, 3‑month T‑bills were about 5.4% in December 2024 (Treasury data). You won’t clip that forever if cuts stick. I still like the ladder for optionality and reinvestment flexibility over CDs.
• Real assets: Prefer cash‑flowing infrastructure (regulated utilities with improving balance sheets, toll roads, contracted renewables) over pure commodity beta. You get yield and inflation linkage without living or dying by spot prices. Commodity curves can lure you in, carry can flip on you fast; I’ve been there, not fun.

Personal finance clean‑up before year‑end

• Refi where it actually pencils: If you’re sitting on high‑rate consumer debt or a 2023 vintage HELOC at a painful rate, run the math now. The average 30‑year mortgage rate peaked near 7.8% in October 2023 (Freddie Mac). If your all‑in rate is still north of that because of credit cards or variable‑rate loans, prioritize refinancing or consolidating at lower fixed rates, even if you don’t touch the primary mortgage yet. Sequence matters: kill the double‑digit APRs first, then revisit the big refi when rate sheets move.
• Tax‑loss harvesting: Harvest losses in losers you don’t want to own into 2026; bank the capital loss and keep exposure via similar (not “substantially identical”) replacements to avoid wash sales. I keep a simple rule: if the thesis is broken and the loss is material, don’t wait for January. Use the loss to offset gains from winners you trimmed earlier this year.
• Asset location: Put taxable bond funds and REITs in tax‑deferred accounts; keep broad equity index funds and long‑term growth in taxable to use qualified dividends and lower LTCG rates. Small tweak, big after‑tax difference over time.

Why this mix now? Because as carry compresses, cash rates glide down, equities with real FCF and duration in bonds start doing the heavy lifting. And yeah, I know, it’s tempting to chase the year’s hottest charts. I still jot a quick pre‑mortem: “If this laggard stays a laggard, what’s my exit?” That tiny step has saved me from at least three holiday‑season regret trades. Also, one more thing, if we get a weird liquidity air‑pocket around year‑end, I want dry powder in T‑bills, not in a fund I can’t move without slippage.

Bottom line: tilt to quality growth and cash‑rich cyclicals, barbell your bonds and walk out the duration, ladder cash knowing the yield is a wasting asset, favor infrastructure for carry, and clean up your liabilities and taxes before December 31. Boring beats heroic this quarter.

What can break the rally: the uncomfortable list

No melodrama, just the bear cases that would dent an “is-the-2025-fed-cut-rally-sustainable” setup, and how they’d actually show up in data and prices so you can react, not guess.

• Sticky services inflation = repriced cuts, higher real yields. If core services stay hot, the market will pull forward “higher for longer” quickly. Watch the 3‑month annualized prints: core PCE services above ~4% would do it, especially if supercore (services ex-housing) refuses to cool. The first tell won’t be CPI headlines, it’ll be 10‑yr TIPS yields jumping 30-50 bps in a few weeks and Fed funds futures shifting to fewer 2026 cuts. In 2023, a quick move in real yields toward 2.5% clipped equity multiples; a smaller echo this year could shave 1-1.5 turns off the S&P 500 forward P/E. Also keep an eye on rent of shelter re-acceleration; even a 0.4% m/m streak for a couple prints reopens the “sticky” debate.
• Growth downshift → earnings wobble. Recessions aren’t announced; they leak into estimates. Track the 3‑month EPS revision ratio (up vs. down). When it sinks below ~0.6 for the S&P 500, future 6‑month returns weaken historically. Small caps sniff it out first: Russell 2000 underperformance vs S&P, especially if R2K trades 5-7% below its 200‑day while the S&P sits above its own, is a classic canary. You’ll also see PMIs hover sub‑50 on new orders and hours worked downshift in the payroll data before headline jobs roll. One more practical tell: guidance language, “softening conversion” or “elongating sales cycles”, starts popping up on calls before the numbers crack. I keep a sticky note for that, literally.
• Policy/fiscal surprise and the term premium. Heavy issuance can yank real rates higher even without inflation. The Congressional Budget Office’s 2025 baseline put the FY2025 deficit near $1.6T (about mid‑single‑digits % of GDP). If Treasury leans on long tenors again, the ACM term premium can lurch higher, remember in late 2023 it jumped roughly 50-70 bps in weeks. Translation for equities: higher discount rates compress multiples, particularly for long‑duration growth. Watch auction tails, bid‑to‑cover in 10s/30s, and real money vs dealer take‑downs. A couple sloppy auctions is your heads‑up that the multiple-expansion party is on borrowed time.
• Geopolitics or a liquidity shock. This one’s simple and mean. The first screen: credit spreads. If high yield OAS widens 75-100 bps in 2-3 weeks, financial conditions tighten fast. Pair that with a stronger dollar, DXY up 2%+, and you’ve got de‑facto tightening that hits cyclicals, EM, and small caps. Add a negative lurch in cross‑currency basis or a pop in front‑end funding spreads (SOFR‑OIS/FRA‑OIS), and you’re in “raise cash, reduce beta” territory. Kinda obvious, but when everything sells at once, the tape won’t give you a polite calendar invite.

Quick aside, because this always trips folks up. You don’t need to predict the catalyst. You need a dashboard. Mine is boring: 10‑yr TIPS, Fed funds path, EPS revision ratio, HY OAS, DXY, and Treasury auction stats. If two or more blink red together, I cut gross, hedge duration, and stop arguing with the market. I’ve learned that the hard way on a few Fridays I’d like back.

Practical triggers: 3m‑ann. core services PCE >4%; 10‑yr TIPS +40 bps in a month; S&P revision ratio 300 bps over a month; HY OAS +100 bps; DXY +2% in two weeks; messy 10s/30s auctions. If you see that mix, the rally is on thin ice.

So, is it sustainable? Here’s the money answer

So, is it sustainable? Here’s the money answer. In my view, yes, it can be, but only if the cuts keep pulling real yields down without spiking inflation risk, earnings actually show up, and the market stops leaning on a handful of megacaps to do all the heavy lifting. That’s not mystical. It’s a checklist you can run every Friday afternoon between calls.

What makes a cut‑fueled rally durable into year‑end? Three pillars: profits, breadth, and credit. If forward EPS keeps trending higher, participation widens, and credit stays calm while the curve re‑steepens in an orderly way, the rally has legs. If those crack, I don’t argue with it, I reduce risk. I’ve learned that the hard way (too many Fridays with the hedges put on at the close).

• Profits: Watch the forward 12‑month EPS path and the revision ratio. A healthy tape tends to live with an EPS revision ratio >0.7 and rising. When that ratio slips to <0.6 while small caps lag by >300 bps over a month, that’s the “thin ice” combo I flagged earlier.
• Breadth: You want more troops behind the generals. A simple tell: % of S&P 500 above the 200‑day MA >60% and rising, plus equal‑weight outperforming cap‑weight on up weeks. If breadth stalls, rallies get fragile.
• Credit/liquidity: High yield option‑adjusted spreads (HY OAS) staying sub‑450 bps is usually fine. If HY OAS widens by +100 bps quickly, or front‑end funding spreads (SOFR‑OIS/FRA‑OIS) jump, credit is “talking.” That’s not a debate you want to win.
• Rates and curve shape: Re‑steepening toward zero or modestly positive on 2s/10s, without disorder. Disorder looks like 10‑yr TIPS real yields jumping +40 bps in a month or ugly 10s/30s Treasury auctions. Those were the exact stress triggers I laid out earlier.

The simple, repeatable checklist into year‑end (steal this, please):

1. Forward 12m EPS: rising on a 4-8 week look; revision ratio ≥0.7 = green.
2. Breadth: S&P %>200‑day ≥60% and equal‑weight holding its own.
3. HY OAS: <450 bps and stable; no +100 bps shock.
4. Funding/FX: SOFR‑OIS/FRA‑OIS calm; DXY not ripping +2% in two weeks.
5. Rates: 2s/10s re‑steepening without a +40 bps monthly jump in 10‑yr TIPS.

My “two lights red” rule: If two or more of the following flip at once, 10‑yr TIPS +40 bps/month, EPS revision ratio <0.6, HY OAS +100 bps, DXY +2%/2 weeks, or messy 10s/30s auctions, I cut gross and add hedges. No heroics.

Actionable stance: Keep a quality bias in equities (balance sheet first, cash flow second), add duration gradually while the Fed is easing this year, and use pullbacks to upgrade what you own rather than chase what just ran. I like scaling into 5-10 year duration in thirds, if real yields back up 15-25 bps, add the next slice. It’s not fancy, it’s just repeatable.

Risk control (the part folks skip until it hurts): Pre‑set drawdown rules so you don’t negotiate with fear. Example: at portfolio −7%, trim beta by 20%; at −10%, add index puts or reduce cyclicals; at −12%, revisit position sizing and factor exposures. Hedge levels written down before the VIX pops save real money. I know, it’s a bit mechanistic; it works.

Net benefit, why this matters for wealth building: Lower discount rates plus real earnings growth is the compounding cocktail you want in retirement and taxable accounts. Lower real yields lift present values and make future cash flows worth more, while actual EPS delivery means you’re not just renting multiple expansion. That combo is what makes reinvested dividends and tax‑efficient holding periods compound more efficiently over time. If we keep checks 1-4 in green and the curve stays orderly, the cut‑aided rally doesn’t have to be a sugar high, it can be the bridge to the next leg in your long‑term plan.

Could it get messy? Sure. Markets are complex and I’m not pretending this is a crystal ball. If I’m overcomplicating it: watch profits, breadth, credit, and real yields. If they’re trending your way, stay in the chair. If two blink red, get smaller and live to compound another day.

Frequently Asked Questions

Q: Should I worry about chasing the Fed-cut rally right now?

A: Short answer: a little. Treat it like a relief bounce that still needs earnings and spreads to cooperate. Before adding risk, haircut 2026 EPS by 10-15%, cap your position sizes, and avoid buying credit inside long-run medians (~140 bps IG, ~500 bps HY). Add duration in tranches, not all at once. If your thesis only works on multiple expansion, dial it back.

Q: How do I sanity-check my stocks if earnings come in light next year?

A: Do a quick-and-dirty re-underwrite. Step 1: cut 2026 revenue growth by 1-2 quarters and trim operating margins 100-200 bps. Step 2: run EPS 10-15% below current sell-side. Step 3: apply a more normal multiple (e.g., 10-year median for the sector, not the peak). Step 4: compare to your hurdle rate, personally I use 10-12% for equities. If the valuation only clears your hurdle with aggressive multiple expansion, reduce. Tactically, favor cash-generative names with pricing power and clean balance sheets; avoid stories that need perfect execution into Q4 earnings season.

Q: What’s the difference between adding duration in bonds and just buying more credit here?

A: Adding duration is a rate bet; buying more credit is a spread bet. With duration, your P&amp;L mainly swings with yields (price change ≈ duration × yield change). Example: an 8-year duration Treasury gains ~8% on a 1% yield drop. Credit layers spread risk on top. If HY OAS tightens from 450 to 400 bps you win, but a 50 bps widening can wipe out quarters of carry. In a post-cut rally, pros often add high-quality duration first (Treasuries/AGG sleeves), then only add credit if spreads still pay you versus long-run medians (~140 bps IG, ~500 bps HY). Ladder purchases and avoid loading both duration and low-quality spread risk at the same time.

Q: Is it better to rotate into cyclicals or stay defensive after the cut?

A: It depends on what the tape is compensating you for today. I’m balancing both, but sizing leans defensive until the earnings math catches up. Here’s a practical approach I’m using right now in Q4 2025:

• Core: keep a quality bias, profitability, free cash flow, and manageable use. If 2026 EPS is 10-15% light, quality should still meet a 10-12% hurdle. Junky cyclicals usually won’t.
• Cyclicals: nibble, don’t chug. Focus on operators with pricing power and clean balance sheets in Industrials, select Semis, and travel/experiences that can flex costs. Avoid names that need China or capex booms to bail them out.
• Defensives: overweight healthcare services, staples with proven pass-through, and software with net retention &gt;110%. Don’t overpay; use sector median multiples, not peak hype.
• Credit: if HY spreads are inside ~500 bps, keep HY light (single-digit % of portfolio) and push incremental fixed income into IG or Treasuries. If IG OAS is near ~140 bps or tighter, prefer duration over spread.
• Duration: add in tranches (ladder 2y/5y/10y). A 25-50 bps rate swing can move an 8-year duration asset ~2-4%, nice convexity without betting the farm.
• Risk controls: set stop-losses, use covered calls on high-beta cyclicals, and harvest tax losses into December where it makes sense.

Net: a barbelled mix, quality defensives as the anchor, selective cyclicals as the call option, until we see revisions stabilize and breadth improve. And yea, if multiples are doing all the heavy lifting, I fade it. Old habits from 2000, 2008, and 2022 die hard.

@article{is-the-2025-fed-cut-rally-sustainable-pro-playbook,
    title   = {Is the 2025 Fed Cut Rally Sustainable? Pro Playbook},
    author  = {Beeri Sparks},
    year    = {2025},
    journal = {Bankpointe},
    url     = {https://bankpointe.com/articles/2025-fed-cut-rally/}
}