Analysis of the Impact of the Fed's Pause in the Interest Rate Cut Cycle on US Stock Valuations and Investors' Asset Allocation Strategies

Based on the above data analysis, I now provide you with a complete analysis report.

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According to CME interest rate futures data, market expectations for the Fed’s 2026 policy path have shifted significantly [1]. Current market pricing shows:

Time Node	Probability of No Rate Change	Probability of Cumulative 25bp Rate Cut	Probability of Cumulative 50bp Rate Cut
January 2026	97.2%	-	-
March 2026	58.5%	26.8%	12.4%
Full Year 2026	Market expects rate cut space to narrow to around 50bp	-	-

This shift in expectations indicates that the Fed may have entered a “pause period” in the interest rate cut cycle, with policy focus shifting from “whether to cut rates” to “when to cut” and “how much to cut”. Uncertainty over the new Fed Chair selection, policy pressure from the Trump administration, and sticky inflation all form the complex backdrop for policy adjustments [2].

Data as of January 13, 2026, shows that major US stock indices generally posted positive returns from December 2025 to January 2026 [0]:

Index	Period Performance	Volatility	Deviation from 20-day Moving Average
S&P 500	+2.22%	0.51%	Approximately 1.14% above MA20
NASDAQ	+2.32%	0.70%	Approximately 1.35% above MA20
Dow Jones	+3.39%	0.62%	Approximately 1.11% above MA20
Russell 2000	+6.08%	0.89%	Approximately 3.31% above MA20

: Small-cap stocks (Russell 2000) have significantly outperformed large-cap stocks, which usually reflects a shift in market expectations for the late economic cycle — capital is beginning to rotate from high-valued large-cap growth stocks to relatively reasonably valued small-cap stocks.

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The Fed’s pause in rate cuts has a “dual effect” on valuations: on one hand, sustained high interest rates pressure high-valued stocks; on the other hand, marginal improvements in liquidity still support valuations [3].

:

Indicator	Current Level	Historical Average	Valile
S&P 500 Forward P/E	21-22x	17x	Approximately 75th percentile
NASDAQ 100 Forward P/E	28-30x	22x	Approximately 80th percentile
MAG 8 Forward P/E	Approximately 35x	25x	Historical High
Equity Risk Premium (ERP)	Approximately 3.5%	4.2%	Relatively Low

1. Interest Rate Environment Constraints
   : The longer the Fed maintains a high interest rate policy, the greater the impact on the “hurdle rate” for discounting future cash flows. High P/E stocks are more sensitive to interest rate changes, and tech growth stocks face pressure from valuation compression [4].

2. Limited Room for Valuation Expansion
   : Institutions such as CITIC Securities point out that the probability of continued significant valuation expansion for major US stock indices in 2026 is low, and the market’s upward momentum will rely more on earnings growth rather than valuation expansion [1].

3. Earnings Taking Over from Valuations
   : The market widely expects that earnings growth will become the main driver in 2026 — the S&P 500’s net profit growth rate is expected to rise to 15.6%, the NASDAQ 100 to 20.0%, and the MAG 8 (tech giants) to 24.5% [1].

Amid the Fed’s pause in the rate cut cycle, market valuation differentiation will further intensify:

• Beneficiary Sectors
  : High-dividend value stocks, small-cap stocks, defensive sectors with low interest rate sensitivity
• Pressured Sectors
  : High-growth tech stocks, high-valued AI concept stocks, long-cycle assets (such as commercial real estate)

: Real Estate (+1.61%) and Consumer Staples (+0.83%) led gains, while growth sectors such as Consumer Discretionary (-1.07%) and Communication Services (-0.73%) underperformed [0].

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Facing the complex environment of the Fed’s pause in rate cuts, multiple institutions recommend adopting a

for asset allocation [5]:

:

Strategy Leg	Allocation Ratio	Core Logic
US Stock Tech/Growth Leg	20-25%	Benefit from AI industrial revolution, high certainty of earnings growth for tech giants
Hong Kong Stock/Dividend Asset Leg	15-20%	High-dividend defensive attributes, relatively reasonable valuation
US Treasuries	20-25%	Attractive yields, capital gains under interest rate peak expectations
Gold/Precious Metals	10-15%	Hedge against geopolitical risks, expectations of weakening US dollar credit
Emerging Markets	10-15%	Diversified allocation, valuation trough

's core is to allocate different types of assets so that the portfolio has relatively well-performing assets in various economic environments. This strategy is based on two core variables — and — and divides the macroeconomy into four scenarios for risk-parity allocation [1].

:

• Core Allocation
  : VOO (S&P 500 ETF) 45% — Value anchor, lowest expense ratio, covers major industries
• Growth Allocation
  : QQQ (NASDAQ 100 ETF) 20% — AI-focused, momentum confirmed, but need to be wary of valuation pullback risks
• Diversification
  : VT (Global Stock ETF) 5% — Geographic diversification, hedges exchange rate risks

:

• Hong Kong high-dividend assets are favored — Internet, consumer, and tech sectors have good investment value
• Emerging markets will see internal differentiation — economies with industrial undertaking capabilities and resilient domestic demand are more likely to stand out [6]

:

• US Treasury yields may fluctuate in a range (the 10-year yield may be in the 4.0%-4.25% range), which can serve as the “ballast” of the portfolio [4]
• Short-term bonds have higher allocation value — expected to follow policy rate declines
• Corporate bonds require caution — valuations are relatively expensive, mainly affected by interest rate changes

• Gold
  : Multiple institutions remain bullish on the allocation value of precious metals. If the Fed insists on cutting rates, US dollar credit may weaken, driving a continuous surge in gold prices [7]
• REITs
  : The pressure on REIT valuations has eased during the rate pause period, but it is still necessary to select high-quality assets

1. Lower Return Expectations
   : Valuations have risen significantly since September 2024, so return expectations need to be appropriately lowered
2. Dynamic Rebalancing
   : Review weight deviations of each component monthly/quarterly, execute sell/buy operations, and maintain target weights within ±2%
3. Take-Profit and Stop-Loss Mechanism
   : Set clear stop-loss points (e.g., when the portfolio falls by more than -8%), and automatically execute take-profit when targets are achieved
4. Focus on Tail Risks
   : If the VIX index rises sharply or the interest rate environment changes significantly (the Fed stops cutting rates or resumes raising rates), the allocation needs to be re-evaluated

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Scenario	Probability	Impact on US Stocks	Allocation Adjustment Recommendations
Base Scenario (Fed pauses rate cuts until mid-year)	60%	Valuations under pressure, earnings take over	Maintain balanced allocation, moderately increase allocation to high-dividend assets
Optimistic Scenario (Inflation falls, Fed resumes rate cuts)	25%	Valuation expansion, broad gains in risky assets	Increase allocation to growth stocks, emerging markets
Pessimistic Scenario (Inflation rebounds, Fed raises rates)	15%	Double whammy on valuations, increased volatility	Increase allocation to defensive assets such as Treasuries and gold

1. Sticky Inflation Risk
   : If US inflation rebounds, the Fed may pause rate cuts or even resume raising rates, which will significantly pressure high-valued stocks
2. Policy Uncertainty
   : Uncertainty over the new Fed Chair selection and policy propositions of the Trump administration may trigger market volatility
3. AI Bubble Burst Risk
   : Institutions such as Citigroup warn that while the tailwind for AI investment will continue, performance differentiation within the groups of technology enablers and applicators will remain a long-term dynamic [1]
4. Geopolitical Risk
   : Uncertainties such as the Russia-Ukraine conflict and China-US relations may trigger market sentiment fluctuations

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1. Valuations Under Pressure but Supported
   : The Fed’s pause in the rate cut cycle pressures US stock valuations, but marginal liquidity improvements and earnings growth expectations provide support for valuations
2. Style Rotation Continues
   : Market capital is rotating from high-valued large-cap growth stocks to low-valued value stocks and small-cap stocks; balanced allocation is recommended
3. Earnings Take Over from Valuations
   : In 2026, the upward momentum of US stocks will come more from corporate earnings-driven growth rather than valuation expansion
4. Allocation Strategy Upgrade
   : It is recommended to adopt a “barbell strategy” or “all-weather strategy” to cope with the complex environment and balance risks and returns

Asset Class	Allocation Recommendation	Core Logic
US Large-Cap Stocks	Standard Allocation (45%)	High certainty of earnings growth, valuations fully priced
US Small-Cap Stocks	Moderate Overweight	Relatively reasonable valuation, benefits from economic cycle
Tech Growth Stocks	Standard Allocation (20%)	Long-term positive for AI theme, but need to wary of short-term valuation pullback
US Treasuries	Standard Allocation (25%)	Attractive yields, expectations of interest rate peak
Gold	Standard Allocation (15%)	Hedge against tail risks, expectations of weakening US dollar credit
Emerging Markets	Standard Allocation (10-15%)	Diversified allocation, valuation trough

: Tech and cycles dance together, earnings take over from valuations, volatility may increase compared to 2025, and future returns will come more from structural opportunities rather than broad-based gains.

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[1] Tencent News - “2026: How to Deploy Global Asset Allocation?” (https://news.qq.com/rain/a/20260109A03RUT00)

[2] OFI Invest - “Perspectives Market and Allocation January 2026” (https://www.ofi-invest-am.com/en/support/perspectives-market-and-allocation-january-2026/)

[3] Stacker - “How policy is setting the stage for markets in 2026” (https://stacker.com/stories/personal-finance/how-policy-setting-stage-markets-2026)

[4] Franklin Templeton - “From the US Market Desk: Rotational bull” (https://www.franklintempleton.com/articles/series/from-the-market-desk)

[5] China Securities Journal - “Public Fund 2026 Investment Strategies Become Clear: Earnings Take Over from Valuations, Tech and Cycles Dance Together” (https://finance.eastmoney.com/a/202601123615653412.html)

[6] China Fund Journal - “Chinese and Foreign Institutions: China Will Be a Market Focused by Global Investors in 2026” (https://www.chnfund.com/article/AR8d8a9e0e-145b-5974-09a1-3a1eba0e5330)

[7] Cailianshe - “How to Allocate Major Assets in 2026? Chief Economists Speak Out” (https://finance.eastmoney.com/a/202601123615693884.html)

[0] Gilin API Market Data (S&P 500, NASDAQ, Dow Jones, Russell 2000 index data, December 2025 - January 2026)