Investors cautious on Fed rate cuts, but stocks remain steady
Investors are scaling back their bets on when the Federal Reserve will begin cutting interest rates, but Wall Street strategists believe this won’t hinder the ongoing rally in the stock market.
Following a recent report showing an unexpected increase in consumer prices, investors are now pricing in just two interest rate cuts in 2024, down from a previous estimate of seven cuts. Despite this, stocks have remained resilient, with the S&P 500 up about 8% year-to-date.
According to Wells Fargo’s chief investment strategist Christopher Harvey, the most significant aspect of the Fed’s discussion is that easing is still on the table. While the timing and magnitude of the cuts might be debated, the fact remains that there will likely be a multiyear easing cycle.
Some market bulls argue that the strength of the economy is more important than the Fed’s rate cuts. Bank of America’s US and Canada equity strategist Ohsung Kwon believes that as long as the economy remains strong, the S&P 500 could reach his firm’s year-end target of 5,400, even if the Fed doesn’t cut rates this year.
Economists are beginning to consider a “no landing scenario,” where economic growth continues to improve while inflation slows down. While this scenario could cause some divergence between large-cap and small-cap stocks, it would provide a positive backdrop for overall market performance.
Investor appetite for small-cap stocks, which are more sensitive to interest rates, has waned as rate cut expectations have declined. Further rate cuts could lead to a rotation towards broader groups of cyclicals and lower-quality stocks. Conversely, a rise in yields could narrow the market regime