The Fed's cutting while the economy's growing: Buy more stocks, hold less cash, this bank says

Societe Generale advises institutional investors to increase equity allocation to 50% from 44% and reduce cash to 5% from 10%, anticipating that Federal Reserve rate cuts in a non-recessionary environment will drive global equities higher, supported by resilient corporate earnings and low private sector leverage. The firm projects the S&P 500 to reach 7,300 by H1 2026, recommending a diversified approach including equal-weight S&P 500, "ex junk" small-caps, and non-U.S. markets like Japan and Europe. This bullish outlook, however, is tempered by some analysts' concerns that if Fed cuts reflect an underlying economic weakening, the positive impact on risk assets could be limited.

Analysis

Societe Generale presents a strongly bullish case for global equities, recommending a significant portfolio reallocation from cash to stocks based on the premise of a Federal Reserve easing cycle occurring in a non-recessionary environment. The firm advocates increasing global equity allocation to 50% from 44% while cutting cash holdings to 5% from 10%, citing historical data that shows dovish Fed policy boosts stocks globally. This optimism is underpinned by resilient corporate earnings, supported by the AI ecosystem and a strengthening profit cycle outside the technology sector, and the potential for price-to-earnings multiple expansion given low private sector leverage. SocGen projects the S&P 500 could reach 7,300 by the first half of 2026 and advises investors to broaden their exposure beyond mega-caps by considering the S&P 500 equal-weight index and quality small-caps. The strategy also emphasizes international diversification, with a doubled allocation to Japanese stocks and a continued positive stance on Europe and emerging markets. However, this outlook is tempered by a key risk highlighted by other market observers: if the Fed's rate cuts are a response to a materially weakening economy rather than a proactive measure, the historical precedent for risk assets would be negative.

Key Decisions for Investors

• Consider increasing equity allocation, funded from cash reserves, to capitalize on the historically positive environment for stocks during non-recessionary Fed rate-cutting cycles.
• To mitigate concentration risk and capture broadening market gains, evaluate shifting a portion of U.S. large-cap exposure to equal-weight indices, quality small-caps, and international markets, particularly Japan and Europe.
• Critically monitor incoming economic data to discern whether Fed cuts are pre-emptive or a reaction to a weakening economy, as the latter scenario poses a significant risk to the bullish thesis.
• Exercise caution with individual stock positions exposed to specific geopolitical tensions, such as Nvidia's reported chip restrictions in China, as these idiosyncratic risks can lead to underperformance despite a positive market backdrop.