No-hike expectations lift XLC and XLRE ETFs

The interest rate expectations have had anything but smooth sailing in 2026.

The year kicked off with an anticipation of a rate cut, which gave way to inflationary pressure and a rate hike.

Yet, with the job market dipping into negative territory and inflation staying subdued, the expectations have flipped again.

According to the CME FedWatch tool, the odds of a rate hike at the Fed's September meeting have sunk to a new low at just 32.14%, paving the way for new equity highs.

While headlines remain glued to big tech, two rate-sensitive sectors emerged as winners — the Communication Services Select Sector SPDR Fund (NYSE: XLC ) and the Real Estate Select Sector SPDR Fund (NYSE: XLRE ).

Both ETFs were among the strongest-performing S&P 500 sector funds yesterday, rising by 2.07% and 1.42%, respectively.

Their outperformance is a positive sign, particularly for the former, which is still down about 4.8% year to date.

Long-Duration XLC Growth Gets a Re-Rating Communication services is packed with long-duration cash-flow compounders.

When yields fall, the present value of those future earnings jumps.

Therefore, names such as Meta Platforms, Inc. (NASDAQ: META ) and Alphabet Inc. (NASDAQ: GOOG ) get a boost when "no hike" news hits the tape.

The same dynamic is supporting Netflix, Inc. (NASDAQ: NFLX ), which received an additional catalyst from Bill Ackman's Pershing Square.

The billionaire investor, who previously lost around $400 million investing in the firm, is now seeking redemption. "We expect Netflix to compound revenue at a double-digit growth rate, with content costs growing more slowly than revenue driving continued margin expansion," he said in an investment letter.

The disclosure helped push Netflix shares up more than 3%, adding momentum to the broader communication-services group.

Yet, the appeal of XLC extends far beyond a handful of stocks.

The ETF offers exposure to secular technology growth through platforms, media and digital advertising, but without relying exclusively on the most expensive semiconductor and hardware names.

If lower yields encourage investors to pay more for future earnings, communication services may be positioned for a significant multiple expansion.

XLRE Gets Direct Financing Relief Real estate is arguably the most rate-sensitive major equity sector.

A decline in the 10-year Treasury yield can reduce the cost of debt financing, improve the relative appeal of dividend yields and support property valuations.

Listed real estate investment trusts are also entering this potential rate pivot with stronger balance sheets than they had before previous tightening cycles.

Nareit's analysis last year indicated a relatively low debt-to-market ratio of 32.8%, with average debt maturities extending beyond 7 years.

That strength limits the sector's exposure to immediate refinancing pressure.

With much of the debt fixed-rate, lower yields may not instantly reduce interest expense across the industry.

But they can improve investor sentiment, lower the cost of future borrowing, and allow more operating cash flow to reach funds from operations, or FFO.

Image via Shutterstock Read Also: Bill Ackman's New Stock Picks Are Here.

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