How UK equities have performed in rate-cutting cycles

With the Bank of England's (BoE) recent interest rate cut, historical trends suggest a potential for mid- and small-cap stocks to outperform large caps in the ensuing year. Past data shows that rate cuts during economic expansions typically foster a bullish investor sentiment with limited drawdown risk.

Additionally, even during recessions, small-cap stocks have historically yielded positive returns on average. Following the BoE's first rate cut in over four years, implemented in August and reducing the key rate to 5%, financial markets are anticipating another cut by year-end.

As the FTSE 100, FTSE 250, and FTSE Small Cap indices approach record levels, market participants are assessing which equity styles are likely to thrive in this initial phase of rate cuts, weighing whether the cut will be interpreted as a stimulus for economic expansion or a signal of a slowing economy.