ETFs to Benefit From Rate Cut Bets and Upbeat Forecasts

The market outlook for the next year is turning out to be optimistic, supported by favorable economic conditions. Following a turbulent year and a choppy November, the S&P 500’s 4.2% gain over the past seven days suggests a potential return of bullish sentiment.

According to Reuters, the market rally ahead of Thanksgiving was supported by a rebound in tech and rising odds of a December Fed rate cut, which boosted investor appetite.

This renewed optimism on Wall Street could revive investor confidence and nudge markets back toward risk-taking.

Inside Wall Street’s 2026 Outlook

In its fresh outlook, Deutsche Bank sees the S&P 500 index climbing to 8,000 by the end of 2026, anticipating “mid-teens” returns from healthy inflows, continued buybacks, and impressive earnings strength carried through 2025, as quoted on Yahoo Finance. This outlook puts Deutsche Bank among the more bullish voices on the Street.

According to the abovementioned Yahoo Finance article, both HSBC and JPMorgan are targeting 7,500 for 2026, with the latter noting that the index could climb to 8,000 if the Fed delivers additional rate cuts next year amid a more favorable inflation backdrop.

More firms are echoing that view, arguing that the next phase of the bull market still has room to run. As per the Yahoo Finance article, Morgan Stanley and Wells Fargo are similarly upbeat and expecting a strong 2026. Both project the broad market index to reach 7,800 by the end of 2026, marking a double-digit jump and roughly 14.5% higher than where it stands today.

Markets Betting on a Dovish Fed Shift

According to Bank of America economist Aditya Bhave, if Kevin Hassett takes over as Fed chair once Jerome Powell steps down, interest rates could drift even lower in the years ahead, creating a more supportive backdrop for equities and helping explain why many firms expect higher S&P 500 levels by 2026, as quoted on CNBC.

Per the CME FedWatch tool, markets are anticipating an 84.7% rate cut in the December meeting, signifying a significant improvement from last week.

ETFs to Consider

Investors should have a long-term perspective and refrain from reacting to short-term market fluctuations. Below, we have highlighted a few ETF areas that could see improved performance in the near term, given the growing likelihood of an interest rate cut by the Fed.

S&P 500 ETFs

Funds tracking the broad market index could offer attractive opportunities. Such investments also provide investors with essential diversification and help reduce concentration risk in specific sectors.

Investors can consider Vanguard S&P 500 ETF VOO, SPDR S&P 500 ETF Trust SPY, iShares Core S&P 500 ETF IVV and State Street SPDR Portfolio S&P 500 ETF SPYM.

Equal-Weighted ETFs

For investors seeking exposure to the upgraded economic forecast with a more balanced portfolio and comparatively lower risk profile, boosting allocations to equal-weighted index funds tracking the broad market may be a suitable approach.

These funds offer sector-level diversification by assigning equal weight to each constituent stock, regardless of market capitalization, reducing concentration risk. This makes them a relevant choice for investors seeking diversified exposure across sectors.

Invesco S&P 500 Equal Weight ETF RSP, ALPS Equal Sector Weight ETF EQL and Invesco S&P 100 Equal Weight ETF EQWL are some good options.

Growth ETFs

Investors can also explore growth ETFs without the constraint of a low beta, taking on more risk to potentially benefit from a positive economic outlook. Growth funds typically excel during market uptrends, providing exposure to stocks with high growth potential.

Investors can consider Vanguard Growth ETF VUG, iShares Russell 1000 Growth ETF IWF, iShares S&P 500 Growth ETF IVW, SPDR Portfolio S&P 500 Growth ETF SPYG and iShares Core S&P U.S. Growth ETF IUSG.

Small-Cap ETFs

Small-cap stocks tend to perform well following rate cuts by the Fed. Being heavily dependent on external borrowings, small-cap stocks could massively benefit from lower interest rates, which could increase their capital availability.

Reduced rates also allow these companies to refinance existing debt at a cheaper rate, enabling them to invest in growth and expansion. As small-cap companies are more domestically tied, they are poised to outperform when the economy improves.

Investors can consider iShares Core S&P Small-Cap ETF IJR, iShares Russell 2000 ETF IWM, Vanguard Small Cap ETF VB, Schwab U.S. Small-Cap ETF SCHA and SPDR Portfolio S&P 600 Small Cap ETF SPSM.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research