More Fed Rate Cuts in 2026? ETFs to Play the Opportunities

Core Insights - Recent inflation data and comments from Fed officials have increased expectations for interest rate cuts, with markets now pricing a 25.5% likelihood of rates being lowered to 3.25-3.5% by January 2026, up from 15.3% a month earlier [1] Inflation Data - Softer U.S. inflation data has strengthened expectations for two or more Fed rate cuts in the coming year, with November's underlying inflation growing at the slowest pace since early 2021 and headline CPI rising 2.7% year over year, below forecasts [2] Fed Leadership and Rate Cuts - Comments from President Trump suggest that the next Fed chair will favor lower interest rates, contributing to market bets on additional rate cuts next year [4] - Fed Governor Christopher Waller indicated that the Fed has room to ease interest rates, citing signs of weakening in the labor market, and suggested that any additional cuts might occur at a moderate pace [5] Financial Sector Impact - Anticipated Fed interest rate cuts in 2026 are expected to provide a significant boost to the financial sector, as lower rates could reduce capital costs for banks and enhance loan activity [7] - The Dow Jones U.S. Financial Services Index has gained 19.70% over the past year and 2.41% month to date, indicating strong performance in the sector [8] Consumer Discretionary Sector - Lower interest rates are expected to improve consumer access to credit and boost spending power, positively impacting profit margins in the consumer discretionary sector, which has seen a 7.17% increase year to date and 2.47% month to date [10] Small-Cap Stocks - Small-cap stocks, which rely heavily on external borrowings, are likely to benefit significantly from lower interest rates, allowing for increased capital availability and refinancing of existing debt at cheaper rates [12]