Invesco: Recent market correction may be an overreaction, expecting only a 0.25% rate cut in the US in September

According to the Wisdom Financial APP, Kristina Hooper, Chief Global Market Strategist at JPMorgan, stated that the recent market correction may be an overreaction, and she expects the Fed to cut interest rates by no more than 0.25% at the September meeting. She believes that the recent global market sell-off is an overreaction. The reasons why stocks may have stabilized recently include, firstly, the Bank of Japan's commitment to a cautious approach to rate hikes. The Bank of Japan's rate hike two weeks ago triggered a sell-off in the international markets. To calm market nerves, the Bank of Japan stated that it will maintain a very cautious stance on further rate hikes in the near future.

The unexpected rate hike by the Bank of Japan disrupted carry trades. Since the Fed began tightening policy in 2022, the interest rate differential between the US dollar and the Japanese yen has been significant, increasing the potential profit from borrowing yen to invest in dollars. However, the recent hawkish stance of the Bank of Japan has reduced the likelihood of this potential profit. Last week, Bank of Japan Deputy Governor Shinichi Uchida stated that due to the significant volatility in domestic and international financial markets, they believe it is necessary to maintain the current accommodative monetary policy stance.

Secondly, the number of initial jobless claims in the US was lower than expected. In addition, key technical indicators suggest that the stock market may have been oversold, such as the Relative Strength Index (RSI), which measures the momentum of recent price changes in securities or indices to assess whether investors are overbought or oversold. An RSI of 70 or above indicates overbought conditions, while an RSI of 30 or below indicates oversold conditions.

The RSI of the S&P 500 index rose above 81 on July 10, indicating an overbought market. However, the situation quickly reversed, with the RSI of the S&P 500 index dropping to 30 on August 5, indicating an oversold market. Similarly, the RSI of the MSCI Global Index rose above 80 on July 16, then dropped to 27 on August 5, indicating an oversold market. Since then, the RSI of both indices has returned to normal, currently hovering around 44-45.

At the same time, bearish sentiment significantly increased last week. Bearish sentiment indicates market expectations of a decline in stock prices over the next six months, with this indicator soaring by 12.3 percentage points to 37.5% last week. This is well above the historical average of 31.0% and is at its highest level since 2024.

Currently, the earnings outlook for US companies is robust, with 91% of companies in the S&P 500 index having reported second-quarter earnings, of which 78% exceeded expectations. The earnings outlook is quite optimistic, with year-on-year earnings growth in the S&P 500 index expected to reach 10.8% in 2024. Third-quarter performance may soften, with expected year-on-year earnings growth of 5.4%, but a significant increase is expected in the fourth quarter.

Earnings growth is expected to remain strong in 2025, with a year-on-year increase of 15.2%. She believes that the Fed will take a cautious approach to rate cuts. The Fed will not make an emergency rate cut before the September meeting as there is no emergency situation to warrant it. In fact, if the Fed were to cut rates before the September meeting, she believes it would only cause significant market unrest She believes that the Federal Reserve's rate cut will initially be very cautious, and she believes that the rate cut at the September meeting will not exceed 25 basis points. If the rate cut in September exceeds 25 basis points, it may instead cause market unrest, as this would indicate that the Federal Reserve is more concerned about the health of the economy than before.

Although it is almost certain that the Federal Reserve will cut rates in September, the market is currently concerned that the July Consumer Price Index released this week may weaken related possibilities. She holds a highly reserved opinion on this because recent overall data indicates a continued resistance to inflation, most notably the wage growth in the July US employment report, which only increased by 3.6% year-on-year.

Despite stocks appearing to have stabilized, she believes that the tension has not dissipated, which could still increase market volatility and lead to an overreaction to data and related developments in the market. She believes that long-term investors can benefit from treating their investment journey as a marathon rather than a sprint