After the Federal Reserve's first rate cut, the market ignited hopes for a soft landing. Is the US stock market poised for a new rally?

According to the latest survey of Bloomberg terminal users obtained by Zhitong Finance and Economics APP, with the Federal Reserve's first rate cut since 2020, the market generally believes that the possibility of a soft landing for the U.S. economy has increased. It is expected that the U.S. stock market will show an upward trend for the remaining time this year.

However, market expectations for the stock market's rise are relatively conservative. In the recent Markets Live Pulse survey, 173 respondents participated, with 44% of them expecting the S&P 500 index to rise by no more than 6% compared to Wednesday's closing price, while 19% of respondents even expect the index to fall. Only 37% of respondents believe that the index's increase will exceed 6%.

Most respondents expect the economy to achieve a soft landing, with 75% predicting that the economy will avoid a technical recession by the end of next year. The 6% expected increase is roughly in line with the year-to-date performance of the S&P 500 index.

After the Federal Reserve's rate cut, both the stock and bond markets experienced declines. Federal Reserve Chairman Jerome Powell warned the market not to expect continued large rate cuts and hinted that borrowing costs may need to remain above pre-pandemic levels for an extended period. This led to the S&P 500 index giving back a 1% gain. Despite Powell's optimistic outlook on avoiding an economic recession, there was still selling in the U.S. Treasury market.

The cautious attitude towards future stock market gains reflects the market's uncertainty about the Federal Reserve's policy path and economic outlook. Since July, the stock market has been volatile, with a sharp decline in early August, another decline at the beginning of this month, followed by a rebound. Investors are skeptical about whether the artificial intelligence boom can continue to drive profit growth. The survey shows that 57% of respondents expect value stocks to outperform the market in the future, while 43% believe that artificial intelligence will make a strong comeback and become a dominant force in the market.

Survey participants tend to agree with Powell's assessment of the economy's health, with 49% believing that now is a good time to buy stocks. 31% lean towards buying bonds, while the remaining 20% believe that holding cash or gold is a better choice. The price of gold fell by 0.4%, erasing this year's record gains.

The Federal Reserve's first rate cut also provides investors with an opportunity to focus on other potential factors that may affect high-risk assets, including the increasingly tense situation in the Middle East and the upcoming U.S. election on November 5th. About 58% of respondents expect that if Donald Trump returns to the White House, the Fed's interest rates will rise by the end of 2025 And the remaining 42% of people believe that if Vice President Kamala Harris wins, the benchmark interest rate will further increase.

Both candidates have proposed plans to increase spending, but neither has addressed concerns in the market about the possibility of federal government debt inflation leading down an unsustainable path.

Fed Unexpectedly Slashes Rates, Market Cautiously Optimistic about Soft Landing for Economy

Prior to the Fed's rate cut announcement, Wall Street traders had already significantly raised the likelihood of a half-point rate cut, surpassing the conventional quarter-point rate cut expectation. However, the actual rate cut decision by the Fed still caught many analysts off guard.

Shima Shah, Chief Global Strategist at Principal Asset Management, stated in a client report, "The Fed's decision for this large rate cut is a rare move in history." She further expressed, "The market has every reason to cheer for today's rate cut, and in the coming months, the market may continue to celebrate." She almost mockingly questioned, "Economic recession? What economic recession?"

Brian Colton, Chief Economist at Fitch Ratings, believes that this rate cut shows the government suddenly refocusing on maximizing employment and displaying great confidence in the inflation progress over the past month and a half. Despite seemingly stable job growth, the Fed may be more concerned about the labor market conditions than most in the market.

Recently, economic data continues to present complex and changing signals. The unemployment rate remains at a historic low of 4.2%, but in the past five months, there have been four months of rising unemployment rates, a pattern that typically signals an impending economic recession. Despite low layoff rates, recruitment activities have almost stalled, especially in some white-collar industries, making the job search path exceptionally difficult for many.

The retail sales report released on Tuesday indicated that while overall consumer spending in the U.S. remains stable, certain discretionary spending categories such as dining show clear signs of weakness.

The Fed uses the federal funds rate as its primary tool to control inflation and unemployment. High rates are used to curb price increases, while low rates aim to stimulate demand and promote employment. In response to the rapid inflation during the COVID-19 pandemic, the Fed began significant rate hikes in 2022.

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Despite the Fed's signals in recent weeks pointing towards a rate cut almost being a certainty, up until the last moment, the market still did not have a clear expectation on whether the Fed would choose a 25 basis point cut or a 50 basis point cut. Some analysts believe that a 50 basis point cut is a necessary measure to prevent an economic recession, while others think that such a rate cut magnitude would be a surprise, implying that the market has overlooked economic weakness Before the Federal Reserve's statement was released on Wednesday, economists at Bank of America said in a report that despite soft data, there was reason for the Fed to cut rates by 50 basis points, but the "fundamental situation" was that the economy would experience a "soft landing" with relatively low unemployment and inflation rates, although the market still worried that the economy might continue to deteriorate.

They wrote, "Despite downside risks, the main message of the meeting should be cautious optimism."

Others believe that the timing of future rate cuts by the Fed will be more important than the rate cut announced on Wednesday. The Fed typically prefers to cut rates gradually - usually by 0.25% - unless faced with an emergency. However, most market participants believe that based on the current economic conditions, the Fed will need to cut rates by at least 1.5% over the next four meetings.

Jay Bryson, Chief Economist at Wells Fargo, believes that the likelihood of an economic recession is about one-third, based on the rising delinquency and savings rates, indicating that consumers are spending faster than they can keep up with inflation.

He said, "We see some cracks in the economy."

The Fed believes that Wednesday's rate cut and other potential rate cuts in the coming months should provide a cushion for further economic deterioration. However, it is not yet clear how quickly consumers and businesses will take advantage of lower rates if they feel that overall economic demand is declining.

Some economists say there are no signs of this yet.

David Mericle, Chief U.S. Economist at Goldman Sachs, said in a client report, "Layoffs remain low, job openings remain high, GDP is growing at a healthy pace, and there have been no major negative shocks."

But not everyone agrees with his views. Economists at Citigroup believe that a more severe economic downturn is imminent, pointing out that a survey shows that since 2010, the proportion of small businesses expecting income declines is the highest, and hiring is expected to remain subdued. They also note that despite recent declines in mortgage rates, there has been no increase in home buying and construction activity, which they believe reflects weak demand.

Citigroup economists wrote, "Businesses have slowed hiring to reduce labor costs. As hiring slows across the board, the likelihood of workers leaving their current jobs will decrease, forcing companies to start actively laying off employees."