Interest rate expectations in 2026 have been anything but a smooth ride. The year started with hopes of a rate cut, then inflation fears flipped the script toward a hike. But now, with the job market cooling and inflation staying subdued, the pendulum has swung back 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 of just 32.14%. That's opened the door for new equity highs, and while the headlines are still glued to big tech, two rate-sensitive sectors are quietly stealing the show: the Communication Services Select Sector SPDR Fund (XLC) and the Real Estate Select Sector SPDR Fund (XLRE).
Both ETFs were among the strongest performers in the S&P 500 sector funds yesterday, with XLC up 2.07% and XLRE up 1.42%. That outperformance is a positive sign, especially for XLC, 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. So names like Meta Platforms, Inc. (META) and Alphabet Inc. (GOOG) get a nice boost whenever "no hike" news hits the tape.
The same dynamic is lifting Netflix, Inc. (NFLX), which got an extra catalyst from Bill Ackman's Pershing Square. The billionaire investor, who previously lost around $400 million on the stock, is now looking for redemption. In an investment letter, Ackman said, "We expect Netflix to compound revenue at a double-digit growth rate, with content costs growing more slowly than revenue driving continued margin expansion."
That disclosure helped push Netflix shares up more than 3%, adding momentum to the broader communication-services group.
But the appeal of XLC goes beyond a handful of stocks. The ETF offers exposure to secular technology growth through platforms, media, and digital advertising, without relying exclusively on the most expensive semiconductor and hardware names. If lower yields encourage investors to pay more for future earnings, communication services could 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.
