How I Made $5000 in the Stock Market

Small-Cap Stocks, Gold, and 3 More Trades for a ‘Great Releveraging’

Oct 08, 2025 16:26:00 -0400 by Ian Salisbury | #Markets

Home builders likely would benefit from lower interest rates. (Angus Mordant/Bloomberg)

Key Points

Declining interest rates could mean Americans take the trillions of dollars locked up in bank accounts and home equity and put it to work, offering a big lift to riskier assets such as small-cap stocks, long-term bonds, and gold.

BofA Securities says a climate of lower interest rates that allows Americans to feel wealthier and borrow more could lead to what it calls a “Great Releveraging.” Consumer spending and bets on risky assets could take off. Rate-sensitive businesses would benefit as well.

BofA Securities calls it a “Great Releveraging”—a climate of lower interest rates that allows Americans to feel wealthier and borrow more, fueling consumer spending and bets on risky assets, while also giving a boost to rate-sensitive businesses.

For now, much of American’s wealth is tied up. Households have the most cash since 1991, the brokerage said in a research note Wednesday. Meanwhile, sales of existing homes are near the lows seen during the 2008-2009 financial crisis.

The culprit in both cases is high interest rates. Elevated rates mean yields on cash are comparatively high relative to other assets. They also make wealthy homeowners reluctant to cash out of expensive homes because that would mean refinancing into new, higher-cost mortgages.

The good news is that last month, the Federal Reserve entered rate- cutting mode, meaning that sooner or later these great traffic jams of consumer wealth could come unstuck.

For this to happen, BofA Securities estimates, it would require 30-year mortgage rates of around 5%, down from 6.3% today; 10-year Treasury yields of 3.25%, down from 4.1%; and a federal-funds rate of 1% to 2%. While that is well below today’s target range of 4% to 4.25%, most Wall Street traders expect the rate to fall to 3.25% or below in the next 12 months, according to futures market data.

“These levels are not our baseline forecast, but they may not be out of reach,” wrote BofA Securities.

If all that cash were put to work, it would send money coursing from homes and savings accounts into riskier assets like stocks and gold.

Among equities, BofA argues, small-cap stocks and home builders could be key beneficiaries. Both have a lot to gain from low interest rates. Small-caps, which tend to have less solid business models, have more debt relative to their size, as well as higher borrowing costs than blue chips. Home builders stand to gain if lower rates make it less expensive to buy a house.

These stocks are already benefiting from the Fed’s shift into rate-cutting mode. Over the past three months the iShares Russell 2000 ETF has returned 12%, handily outperforming the S&P 500’s 8.8%.

Home builders haven’t rallied in the same way. That is because mortgage rates remain relatively high and consumer sentiment is weak.

While circumstances just haven’t changed enough to jolt the housing market out of its funk, there is still hope. BofA Securities notes that over the past six rate-cutting cycles, home builders have outperformed the market by nearly 20 percentage points, on average.

Other potential releveraging winners include long-term Treasuries and emerging-markets debt, both of which stand to gain from lower rates and gold. Bond prices move in the opposite direction to interest rates, and long-term bonds are more rate sensitive than short-term bonds.

Gold, meanwhile, tends to gain value when investors are worried about inflation. The Fed’s recent policy of lowering interest rates while inflation remains above its 2% target could continue to boost prices.

Write to Ian Salisbury at ian.salisbury@barrons.com