Investors are pushing back on bets on when the Federal Reserve will start cutting interest rates, but many Wall Street strategists think that won’t be the case. increase stock prices in 2024.
After a key inflation report on Wednesday showed an unexpected rise in consumer prices last month, investors now expect just two interest rate cuts in 2024, down from a peak of seven in early January.
Despite the market falling in response to Wednesday’s latest inflation data, stocks have largely weathered changes in interest rate expectations this year, with the S&P up about 8% year to date. A change in market expectations regarding Fed policy is therefore likely. This is unlikely to derail the stock market rally.
Christopher Harvey, chief investment strategist at Wells Fargo, who on Monday raised his year-end target for the S&P 500 (^GSPC) to a high of 5,535, told Yahoo Finance that the most important part of The Fed’s discussion remains that easing is still ongoing. pipeline.
“The most important thing is that the Fed is going to begin a multi-year cycle of easing,” Harvey said. “We can discuss the timing and magnitude, but the problem is that this is a multi-year easing cycle.”
Bull markets have also been encouraged by limited signs that high interest rates are slowing corporate profits or U.S. economic growth. Consensus estimates call for earnings growth to accelerate throughout the year.
“It’s really about earnings,” Ohsung Kwon, Bank of America’s U.S. and Canadian equity strategist, told Yahoo Finance, explaining why the S&P 500 could still reach the 5,400 target of the late S&P 500. year of his company even if the Fed did not lower rates. This year.
Kwon and other strategists who spoke with Yahoo Finance in recent weeks all expressed the same sentiment: It doesn’t matter when or how much the Fed cuts this year. It might not even ruin the market recovery if the Fed doesn’t cut rates at all in 2024. What matters most is why the Fed cuts rates when it does.
“As a bull, I would rather see the Fed reduce its cuts because the economy is very strong rather than having to cut rates because the economy is weakening,” Kwon said.
A “no landing” for stocks
A growing number of economists say the improving outlook for economic growth creates a high probability that the Fed could cut rates less than expected, if at all. This is often called a “no landing scenario,” in which economic growth accelerates while the downward trajectory of inflation slows.
Overall, this isn’t too bad for the major indices given that this would come with a backdrop of positive economic growth, which is why strategists believe earnings growth could extend beyond of technology alone later this year. This, however, could create a new bifurcation between large- and small-cap stocks.
In a weekly note published Sunday, Morgan Stanley Chief Investment Officer Mike Wilson wrote that the recent cyclical leadership of sectors like energy (XLE), materials (XLB) and industrials (XLI) indicates that the market is moving towards a “no landing” scenario.
As part of these moves, investors favored large-cap companies, according to Wilson’s analysis. Small caps, Wilson noted, have shown greater rate sensitivity and have fallen more than the broader market on days when bond yields rise.
That happened on Wednesday, when the 10-year Treasury yield (^TNX) climbed more than 20 basis points and the small-cap Russell 200 index (^RUT) fell nearly 3% while that the S&P 500 slipped less than 1%.
The market development highlights that investor appetite for sectors such as small caps, which are more exposed to debt refinancing at current high interest rates, will remain subdued as long as expectations of rate cuts continue to rise. lower.
He added: “A rate cut could further catalyze a rotation into a broader group of cyclicals and even lower quality stocks with poorer balance sheets. Conversely, a breakout in yields higher could return us to a tight market regime. »
Josh Schafer is a reporter for Yahoo Finance. Follow him on @_joshschafer.
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