| Here we are on the cusp of another Federal Reserve rate decision. And I'm thinking about ... equities. There are a few reasons for that, the first being that the Fed's rate decision is already fully priced in, jitters around NY Community Bancorp notwithstanding. No change. But it helps that we're in the midst of earnings season, with the technology giants that have been driving the market reporting earnings right now. Most important? We may be on the cusp of the period that will decide who the next market leaders will be — a potential make-or-break moment for long-term investors. Don't believe me? I've got a chart for you: Imagine you had seen the dot-com bust unfolding at the turn of the century. If you had turned away from tech and overweighted into energy, the best-performing sector in the 2000s, you would have earned nearly 150%. By contrast, tech and telecom — the go-go sectors of the prior decade — would have lost you half your money over a full decade. And that's before inflation, a truly awful performance. Here's the thing though: The chart above shows you a complete reversal of fortune as that decade ended following the Great Financial Crisis. Had you overweighted tech in 2009 through the end of last year, you would have gained over 1600% compared to the S&P 500 Index's gain of just over 600%. Energy? It brought up the rear, underperforming massively with a 164% gain in the 15-year time span. My takeaway: Sector rotation matters a lot. It's not the timing of the move per se, though 2009 was very good for the S&P 500 Information Technology Index, up over 60%. But you still would have massively outperformed had you turned to tech a year later. The reality is that — unlike in the 2022 bear market — once the economy and markets turn down together, previous sector leaders not only fail to maintain their dominance, they often fall precipitously, lagging the broader market for long periods of time, as we saw with tech in the 2000s and energy over the past 15 years. My thesis here is that the Fed's recent pivot will matter for rotation if it comes as a result of economic weakness. The last time the Fed raised rates was in July 2023. That was six months ago. And while everyone is hanging their hats on lower inflation to elevate real interest rates and spur rate cuts, the reality is that the US economy is still outperforming enough that the Fed could be on hold for much longer than we anticipate. And then what? I think we have two outcomes. The first is a situation where the economy remains robust and the Fed holds pat or even raises rates. That' would be "bad" in the sense that it would risk fostering an overly restrictive environment that might sow the seeds of a hard landing — a recession that would force cuts and a bring about a rotation of sectors. The second scenario is a situation where the economy decelerates and the Fed feels obliged to cut as a result. This isn't necessarily a bad outcome if the slowdown is gradual enough to keep employment and earnings growth humming along. And it could keep both US stock and large-cap tech outperformance alive. But it is also a narrow path that involves both the subset of outcomes where inflation falls and growth moderates without a recession. It seems like a base case for many now, if you extrapolate the recent past forward. But recession or overheating followed by a hard landing are also plausible and can't be discounted. As the data plays out, we will get a better sense of which outcome is likely to play out and how that may influence the timing and extent of Fed cuts. How hard the Fed pivots will determine how hard the rotation in sector performance will be. | 
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