The Fed Has Opened the Door to Rate Cuts — Here’s What That Means for Different Sectors

Wall Street is finally admitting what many investors suspected — the tech rally might be running out of steam. After years of the Magnificent Seven carrying the entire stock market to record highs, money is starting to flow toward the unloved corners that actually benefit when interest rates fall. That rotation could shift which stocks lead the way for the rest of 2025.

Tech’s moment of truth: The sector that powered most of this year’s rally faces its biggest test as NvidiaNVDA

reports earnings Wednesday, with investors asking whether AI spending can finally translate into profits. OpenAI’s GPT-5 didn’t help either — with critics dismissing it as “a model router” rather than the leap toward superintelligence many investors had hoped for. The underwhelming rollout sparked broader skepticism around the AI hype, with MetaMETA

freezing its AI hiring spree and an MIT report showing AI adoption hasn’t yet produced profits for most companies. That sense of letdown is amplifying concerns about just how dependent markets have become on a few dominant players:

• The top 10 firms in the S&P 500 now account for 40% of the index’s value, with concentration at historic highs that make the entire index vulnerable to tech selloffs.
• Retail traders have become net sellers of tech for the first time in two months as enthusiasm for AI names like PalantirPLTR
  , AlphabetGOOGL
  , and BroadcomAVGO
  cools.

The Underdog Rally Begins

The anticipated September rate cut is already energizing sectors that thrive when borrowing costs fall and economic activity picks up. Small-cap stocks demonstrated their rate sensitivity by reaching their highest 2025 levels on Friday after Powell’s Jackson Hole speech. Similarly, Bank of America’s Savita Subramanian favors energy, financials, and consumer discretionary — sectors “lightly held by active investors” yet well-positioned to benefit from lower rates and a potential economic rebound.

• Subramanian recommends sticking with mid- and large-cap stocks for now, arguing they offer more stability until the Fed provides clearer signals on policy.
• She also cautions that in a sticky inflation environment, cash is “probably the worst investment,” since rising prices steadily erode its real value.

Power in balance: Alongside these sectors, investors are rotating into equal-weighted funds that give smaller companies the same clout as megacaps. The gap between equal- and cap-weighted indices is now the widest since 2003, with the equal-weighted S&P 500 outperforming over the past two weeks. J. Safra Sarasin’s Wolf von Rotberg believes stretched valuations are making these assets more attractive, with Pictet Asset Management’s Arun Sai echoing that view, calling equal-weighted exposure “a great way to hedge your bets in terms of where the current [economic] cycle is going.”