- Pivot & Flow
- Posts
- Rate Cut Cheat Sheet
Rate Cut Cheat Sheet
Alpha in an Unprecedented Cycle
J.L. Bernstein
August 17, 2025
In partnership with
Happy Sunday
Well this is awkward.
I'm stumped on how to write this without giving "advice."
Here's the reality: with the Fed telegraphing every thought and bond markets pricing in a 93% chance of September cuts, most of the obvious opportunities are already gone. So it's our job to hunt for the remaining inefficiencies and lean on historical data about what actually works when rates start falling.
Please don’t treat this as direct advice but more as a framework and a state-of-mind of what sectors and types of companies tend to go up when the federal funding rate goes down. I know this is dry but it’s important, so I kept it as short N’ sweet as possible.
Potential Alpha Opportunities
1. Mortgage REITs - Contrarian Play
Potential Opportunity: VanEck Mortgage REIT ETF (MORT) yields 14.9% and remains near distressed levels despite approaching rate cuts.
Why It may Work: Mortgage REITs borrow short-term to buy long-term mortgages. Rate cuts directly improve their net interest margins. Top holdings include Annaly Capital (NLY) 15.5% and AGNC Investment 12.9%.
2. Small-Cap Value with Floating-Rate Exposure
The Opportunity: Russell 2000 trades at 18 P/E vs the S&P 500 (large caps) trading at a 27 P/E
Why Small-Caps Benefit Most: Many smaller companies borrowed money with variable interest rates (rates that adjust with Fed changes) rather than locking in fixed rates. When the Fed cuts, their loan payments drop immediately, it’s an instant boost. Academic research confirms that credit channel theory demonstrates rate cuts disproportionately benefit financially constrained firms by improving balance sheets and reducing external finance premiums.
I’m using broad small-cap value ETFs (VBR, IWM) rather than individual stock picking here.
We likely have all been burned on small caps, I’m staying diversified when going this small.
3. Homebuilders - Selective Positioning
The Opportunity: Mortgage rates drop (obviously), unlocking significant affordability for middle class folks.
Example*****:
Catalyst Timeline: 75% of builders currently offering mortgage buydowns at ~5%. When actual rates drop below 6.5%, artificial buydowns become unnecessary and margins expand.
4. Quality Companies with Strategic Debt Structures
I’m looking at you $UNH ( ▲ 2.11% )
Example: AbbVie (ABBV)
$70B total debt with $22Bish annual operating cash flow
Pharmaceutical business provides recession-resistant revenue
Every 100bp rate cut saves ~$700M annually in interest expense
What Could Go Wrong
Primary Risk: Persistent inflation above 2.7% combined with tariff-induced cost pressures could halt anticipated cuts.
Secondary Risks:
Geopolitical shocks affecting energy prices
Dollar strength undermining international plays
Stay curious 🙂
- John
Disclosure: This analysis reflects Pivot and Flow’s views and isn’t personalized advice or Financial Advice. All investments carry risk, including complete loss of principal.
Today’s Sponsor
Former Zillow exec targets $1.3T market
The wealthiest companies tend to target the biggest markets. For example, NVIDIA skyrocketed nearly 200% higher in the last year with the $214B AI market’s tailwind.
That’s why investors are so excited about Pacaso.
Created by a former Zillow exec, Pacaso brings co-ownership to a $1.3 trillion real estate market. And by handing keys to 2,000+ happy homeowners, they’ve made $110M+ in gross profit to date. They even reserved the Nasdaq ticker PCSO.
No wonder the same VCs behind Uber, Venmo, and eBay also invested in Pacaso. And for just $2.90/share, you can join them as an early-stage Pacaso investor today.
Paid advertisement for Pacaso’s Regulation A offering. Read the offering circular at invest.pacaso.com. Reserving a ticker symbol is not a guarantee that the company will go public. Listing on the NASDAQ is subject to approvals.