Markets gained some momentum ahead of Wednesday's Federal Open Market Committee (FOMC) meeting. The CME FedWatch tool shows a rate cut is unlikely, and investors are no longer expecting a rate cut announcement at the March meeting.
Eric Lynch, managing director at Scharf Investments, joins Yahoo Finance to share insights on what investors should focus on if the Fed doesn't cut rates.
Lynch suggests a focus on profit growth: “If you look at what's going on in the market, at least the stock market, from the mega-caps of U.S. technology companies, Mag7, to all kinds of different “We're seeing very strong rotation into companies” areas: cyclical, financials, international, small-cap stocks. And what this is telling you, what investors are trying to tell us, is that perhaps we This means that we need to shift our attention from the macro to the micro and focus on profitability. “
For more expert insights and the latest market trends, click here to watch the full episode of Yahoo Finance Live.
Editor's note: This article was written by Nicholas Jacobino
video transcript
Rachel Akuffo: We expect stocks to rise today as investors await the latest Fed decision on Wednesday. Investors are no longer expecting a rate cut at the March meeting. So what should you focus on if you can no longer see it?
Introducing Eric Lynch, Managing Director of Scharf Investments. Thank you for joining us this morning. This week, we take a look at what some investors are actually thinking. Obviously, we know that it's not just the AI push that's driving some of the bull market up here, but the Fed as well.
If rate cuts are off the table here, what should we focus on at this meeting?
Eric Lynch: Yeah. I think rate cuts are clearly off the table, Rachel, because you have very strong CPI, PPI print, and sustained strong employment growth. Yes, the economy is slowing down a bit. But it's still strong.
So there is no reason at all to cut rates this week, and perhaps next. The market is actually not pricing in the first rate cut, which is most likely by June. Therefore, I think what investors need to pay attention to is how fast interest rates will be cut going forward, and when that will happen.
It appears that there were three cuts to the dot plot heading into this FOMC meeting. That could be reduced to two. But I would argue that we are divided at this point.
Akiko Fujita: Analysts say the timing of this is not necessarily critical. What you mean is what that cycle looks like. If we get a fairly consistent message from the Fed chair, do we expect, or are we anticipating, any significant movement in the markets as a result of this meeting, based on what Chairman Powell has said? . Most of it seems already factored in.
Eric Lynch: I think so, Akiko. What's interesting is if you look at what's going on in the markets, at least in the stock markets, there's been a pretty strong rotation from Mag7, which is a technology company where the US invests mega-caps, into all sorts of areas, whether it's cyclical, financial, international, etc. You can see what's happening. , a small hat.
So I think what investors are trying to tell us is that we probably need to shift our attention from the macro to the micro. Start looking at future earnings. If you think about it, what actually moved the stock market in 2023 was the S&P 500 up his 26%. Profits were flat.
And now, with immediate and deep rate cuts off the table, all eyes will be on future economic and profit growth.
And I think that's what we need to start focusing on in our future guidance for 2024.
