Don't be fooled! Bank of America warns: This wish of the bullish stock market is unrealistic!
Bank of America warns that the hopes of a bullish stock market are unrealistic, believing that the upcoming Fed rate cut will trigger trillions of dollars of money market fund inflows into the stock market. Bank analysis points out that even if the Fed cuts rates by 25 basis points, depositors may still not change their savings behavior, and to draw funds out of money market funds, a rate cut of 300 basis points is needed. In addition, if funds flow out, they are likely to prioritize flowing into fixed income assets such as bonds rather than the stock market
A $60 trillion money market fund cannot save the stock market from painful declines.
Over the past year, a common component of the bullish argument for U.S. stocks has been that once the Federal Reserve cuts rates, trillions of dollars in idle cash will flow into the stock market, putting downward pressure on the 5% risk-free return provided by most money market funds.
However, Bank of America argues that things are not so simple and presents two structural reasons explaining why money market funds may not be the catalyst for a sustained bull market rebound in U.S. stocks that many investors expect.
Firstly, a 25 basis point rate cut by the Federal Reserve may not change depositor behavior, as a cash yield close to 4% still remains significantly higher than the near 0% rates offered from 2009 to 2021.
According to the bank, even a rate cut of several hundred basis points by the Federal Reserve may not be effective.
"Historically, money market fund asset growth is typically positive unless front-end rates are below 2%," said Bank of America rate strategist Mark Cabana in a report last Thursday.
According to Cabana, for money market funds to experience outflows, the Federal Reserve would need to cut rates by at least 300 basis points, which is not expected to happen in the near term. Cabana said, "Fed rate cuts will slow the inflow into money market funds, but inflows will remain positive unless rates are near zero."
The Chicago Mercantile Exchange's Fed Fund Rate Futures tool shows that the federal funds rate target may still be slightly above 3% in December 2025.
The second issue is that even if the Federal Reserve cuts rates significantly and triggers a wave of redemptions in money market funds, these funds may not flow into the stock market.
According to Cabana, bonds would be the biggest beneficiaries, as the main competitors of money market funds are near 0 yield checking accounts, not stocks. "If money market funds experience outflows, cash may flow into higher-yielding fixed income assets rather than stocks. For these funds, moving from money market funds to stocks is like crossing a chasm."
Analysts suggest that bulls in the stock market should ultimately abandon the idea that trillions of dollars in money market funds will help support stock prices. Cabana concluded:
"From a risk-taking perspective, cash in money market funds is likely to remain on the sidelines."