What this research found
Should investors rotate out of growth stocks and into value ahead of expected Federal Reserve rate cuts in 2026? Three past easing cycles — 2001, 2007 and 2019 — were measured against current conditions, and the answer came back no: with a normal yield curve and inflation near 2%, the present setup resembles 2019, when growth beat value by 35.6 percentage points. The 31-page memo instead recommends buying rate-sensitive sectors regardless of style, led by homebuilders, health care and materials, with energy and the S&P 500 as hedges.
- The current regime reads as mid-to-late expansion, not pre-recession: the 10-year to 2-year Treasury spread is a positive 0.72%, the 10-year yields 4.26% against a 3.64% fed funds rate, CPI inflation runs at 1.96% and unemployment sits at 4.40%.
- Value's edge over growth in easing cycles is not consistent. In 2001 value fell 4.9% while growth fell 21.8%, a 16.9 point advantage; in 2007 value lost 22.0% against growth's 16.5%, lagging by 5.5 points; and in the 2019 insurance cuts value fell 6.1% while growth gained 29.6%.
- Multi-factor scoring put homebuilders top at 86.2, ahead of health care at 77.6 and materials at 71.9, with the S&P 500 (24.7) and energy (20.9) held as hedges. Homebuilders carry a -0.85 beta to Treasury yields and health care -0.60.
- A hard landing is the dominant risk. A 10% equity drawdown costs materials 12.3%, homebuilders 9.3% and health care 9.1%, roughly 9.9% at portfolio level, whereas a 50 basis point rate rise costs the longs only 1.0% to 1.8% and leaves energy 0.9% higher.
- The book scores 0.70 out of 1.00 on diversification. Energy is the effective hedge at 0.19 average correlation to the long positions, while the 0.74 correlation between homebuilders and materials is the main concentration risk.
How it was done
Federal Reserve Economic Data series covering the Treasury curve, the fed funds rate, CPI, unemployment, jobless claims, industrial production and consumer sentiment were pulled to classify the current regime. Returns for value and growth indices, and for sector exchange-traded funds, were then measured from the pivot dates of the 2001, 2007 and 2019 easing cycles. Sector candidates were scored on a weighted combination of beta to 10-year yields, three-month momentum with 14-day RSI, and past performance in easing cycles, then assembled into a five-position book with 30/25/20/15/10 percent sizing. The book was stress-tested against a 50 basis point rate rise and a 10% market drop and checked on six-month rolling correlations, and the whole analysis was written up as a 31-page memo with 15 figures.
Data sources
- Federal Reserve Economic Data — Treasury yields, fed funds rate, CPI, unemployment, jobless claims, industrial production and consumer sentiment through late February 2026
- Russell 1000 Value and Growth index fund returns across the 2001, 2007 and 2019 easing cycles
- Sector exchange-traded fund price histories including homebuilders, health care, materials, energy and the S&P 500
- Fund flow data from the Investment Company Institute
- Institutional research from Goldman Sachs, J.P. Morgan, Morningstar and State Street
Limitations
The conviction score weightings are reasoned rather than backtested, and the exchange-traded fund flow data used for positioning is a lagging indicator. The analysis is also entirely US-focused and expressed through sector funds rather than individual stocks.
Figures from this analysis
How this research was produced
K-Dense Web planned and ran this macro strategy investigation end to end — gathering the sources, carrying out the analysis, producing the figures, and drafting the report. The full session transcript, including every intermediate step, is available to view.
