Top 3 Key Investment Trends You Can’t Ignore Ahead of Rate Cuts

Key Points

• As the Fed's meeting to cut interest rates has set the narrative for most of the stock market's upcoming action, investors should focus their capital on three new trends.
• Price action has confirmed the growing bullish sentiment in these areas, and further analyst optimism only pushes the envelope higher for them to keep delivering.
• Double-digit EPS growth and upside-through valuations are the main pillars of giving investors the type of price action they want to see in 2024.

The Federal Reserve (the Fed) has now set the agenda for investors to consider a few trends as the September Fed meeting gets underway in a few days. Some mega investors have found U.S. stocks too risky at the moment, particularly the technology sector, so they’ve looked to emerging markets like China to cushion any potential volatility that might come from the Fed’s decision.

Others have found a safe haven in other asset classes like commodities and bonds, a trend investors can notice through the price action in the SPDR Gold Shares NYSEARCA: GLD and the iShares 20+ Year Bond ETF NASDAQ: TLT making new 52-week highs on the expectation of lower rates ahead. There are other places. However, that has yet to catch up to this new sentiment, creating new opportunities for investors to tag along before they become mainstream ideas.

One of the favorite places is the small-cap stocks space, as Fundstrat’s Tom Lee has recommended them for the end of 2024. Specifically in the small-cap space, investors can find just how bullish Wall Street has become on names like Krispy Kreme Inc. NASDAQ: DNUT.

Another trend to be helped by rate cuts is the energy sector, where stocks like Chesapeake Energy Co. NASDAQ: CHK and Transocean Ltd. NYSE: RIG could shine in the next few quarters.

Small-Cap Stocks Like Krispy Kreme Set to Rally on Potential Rate Cuts

Small businesses tend to lean more heavily on available and flexible financing to expand and deal with the business cycle properly, so small-cap stocks have all the fundamental reasons behind them to achieve a potential new run higher.

For those who like to diversify, Tom Lee has recommended the iShares Russell 2000 ETF NYSEARCA: IWM as a broader portfolio of small-cap stocks. Considering that this ETF has underperformed the broader S&P 500 by as much as 8% over the past 12 months, investors could consider a potential rotation, which may bring the catch-up performance that everyone is looking for.

However, the big double-digit upside may be easily found in Krispy Kreme, as Wall Street analysts now expect up to 76.9% earnings per share (EPS) growth in the company for the next 12 months. These massive growth forecasts helped those at Bank of America land a price target of $16 a share for Krispy Kreme stock.

To prove these analysts right, the stock would need to rally by as much as 36.2% from its current price. The $270.9 million of institutional capital that entered the stock over the past 12 months backs this confidence and view.

During the past year, Krispy Kreme has underperformed the Russell 2000 ETF by over 28%. Hence, investors now have a double-tailwind effect as the stock needs to catch up to not only the ETF but also the broader S&P 500 index.

Rate Cuts Could Signal an Oil Bottom, Presenting a New Opportunity for Investors

Oil prices have struggled to get past $70 a barrel during the past quarter, reflecting the market's bearish view on the economy today. However, as the Fed is set to cut interest rates in the coming days, cheaper financing rates and ample liquidity could boost business activity.

Business activity getting hotter typically is tied to higher oil demand, which in turn leads to higher prices. This could be why Warren Buffett sought to buy up to 29% of Occidental Petroleum Co. NYSE: OXY in the past quarter to express his bullish expectations for oil.

The fact that Buffett decided to sell out of Apple Inc. NASDAQ: AAPL by 50% while also loading up on oil should tell investors all they need to know about the next potential market swing.

Despite Occidental being a good pick, retail investors have greater flexibility when it comes to stock picking, so moving higher up in the value chain can potentially yield a bigger and faster profit. This is where Chesapeake Energy and Transocean come into play.

Chesapeake operates as an exploration and production business, so they will see the benefits of higher oil prices before producers like Occidental.

This is why Wall Street analysts forecast up to 303.8% EPS growth in the next 12 months, along with Stephens' $118 price target, calling for up to 61.1% upside from where the stock trades today.

Even better positioned in this race is Transocean, as it rents rigs and other equipment to the big producers. When oil prices rise and production becomes more attractive, this stock could soar.

This is why Wall Street analysts expect the company to swing from a net loss per share of $0.19 this year to a net profit of $0.28 in 12 months.

This massive swing into profitability has helped a consensus price target of $7.25 a share, calling for up to 75.5% upside from today's price. More than that, a company's Director has been buying the stock all quarter, in multi-million share positionings.