Investors are holding off on bets on when the Federal Reserve will start cutting interest rates, but many Wall Street strategists believe it won't happen. Stock prices may rise in 2024.
Investors are pricing in just two interest rate cuts in 2024 after a key inflation report on Wednesday showed a surprise rise in consumer prices last month, compared to seven at a peak in early January. It has been decreasing since.
Despite the market pullback in response to Wednesday's latest inflation numbers, stocks are largely resilient regarding the movement in interest rate expectations this year, with the S&P up about 8% year-to-date, so market sentiment on Fed policy remains high. Changes in expectations are expected. It is unlikely to derail the stock market rally.
Christopher Harvey, chief investment strategist at Wells Fargo, on Monday raised his year-end target for the S&P 500 Index (^GSPC) to a record high of 5,535, telling Yahoo Finance that the most important part of the Fed discussion is easing. said it is still ongoing. pipeline.
“The big, important thing is that the Fed is starting a multi-year easing cycle,” Harvey said. “We can debate when and how much mitigation to do, but the fact is that it's a multi-year mitigation cycle.”
Market bulls are also supported by limited signs that high interest rates are slowing corporate profits and U.S. economic growth. Consensus forecasts call for earnings growth to accelerate throughout the year.
“It's really important,” Oson Kwon, Bank of America's U.S. and Canadian equity strategist, told Yahoo Finance when explaining why the S&P 500 could reach his company's year-end target of 5,400 even without the Fed cutting interest rates. It's all about the profits,” he said. this year.
Kwon and other strategists who spoke to Yahoo Finance in recent weeks all expressed the same sentiment: “It doesn't matter when or how much the Fed cuts rates this year.” Even if the Fed doesn't cut rates at all in 2024, it might not even derail the market rebound. The most important question is why the Fed cuts rates when it cuts them.
“As a bull, I'd much rather see the Fed cut rates less because the economy is so strong than to see them cut rates less because the economy is weak,” Kwon said.
Stock price “no landing”
A growing number of economists say the improving outlook for economic growth makes it more likely that the Fed will cut rates by less than previously thought. This is often referred to as a “no-landing scenario,” in which economic growth accelerates while the downward trajectory of inflation slows.
Overall, this isn't all bad for the major indexes given the backdrop of positive economic growth, with strategists saying earnings growth could extend beyond the technology sector later this year. That's why I'm thinking about it. However, further dichotomy between large and small-cap stocks is likely.
Mike Wilson, Morgan Stanley's chief investment officer, said in Sunday's Weekly that the recent cyclical leadership of sectors such as energy (XLE), materials (XLB) and industrials (XLI) means the market is “no-landing.” I wrote that I was pointing out that we are moving towards a scenario.
According to Wilson's analysis, investors are favoring large-cap stocks amid these developments. Wilson pointed out that small-cap stocks are more sensitive to interest rates and fall more than the broader market on days when bond yields rise.
This played out on Wednesday, with the 10-year Treasury yield (^TNX) surging more than 20 basis points and the small-cap Russell 200 index (^RUT) falling nearly 3%, while the S&P 500 index It was less than 1%.
This market movement confirms that as long as expectations for rate cuts continue to decline, investor appetite for areas such as small-cap stocks, where interest rates are currently high and debt refinancing exposure is high, will remain muted.
He added: “Lower interest rates could further drive rotation into broader cyclical stocks, and even into lower-quality stocks with weaker balance sheets. “If yields rise, we could return to a narrow market regime.”
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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