Prominent "Big Short": Fed Rate Cut Decision Has Limited Impact on US Stocks!

Top strategists on Wall Street say that the impact of the much-anticipated Fed rate cut this week on US stocks is not as significant as the health of the US economy.

The market widely expects the Fed to cut rates for the first time in four years early Thursday, with investors wavering between a 25 basis point cut and a 50 basis point cut. Expectations of loose monetary policy and strong economic data so far have driven the S&P 500 index up more than 30% since November last year, with investors now assessing whether the US can avoid an economic downturn after years of high interest rates.

Mike Wilson of Morgan Stanley wrote in a report, " If job data weakens from now on, regardless of whether the Fed's first rate cut is 25 basis points or 50 basis points, the market may trade with a risk-off tone."

Wilson is one of the most famous bears until mid-2024. On the other hand, he stated that if the job situation improves, the Fed will cut rates by 25 basis points continuously by mid-2025, which could further support US stock valuations.

Forecasters at Goldman Sachs and J.P. Morgan also warned that given the uncertainty of the economic outlook, the importance of Fed policy rates to US stocks has diminished.

David Kostin, a strategist at Goldman Sachs, wrote in a report on September 13, "While some investors believe that the pace of Fed rate cuts will be the key determinant of US stock returns in the coming months, the trajectory of economic growth is ultimately the most important driver of US stocks."

Over the past two months, due to uncertain economic prospects, US stocks have experienced greater volatility. The upcoming US election has become another risk in the near term.

Furthermore, signs of economic slowdown will weigh on overly optimistic expectations for profit growth in the coming quarters. An index from Citigroup shows that in recent weeks, there have been more analysts lowering profit expectations than raising them.

Historical Signals

The Morgan Stanley strategy team, including Mislav Matejka, studied the historical response of the S&P 500 index to Fed rate cuts to find clues.

The strategist stated that historically, the initial reaction of US stocks to policy easing has been mild, with "subsequent performance varying greatly depending on which growth outcome prevails."

He noted that rate cuts before an economic recession "inevitably" led to a lower benchmark index for the year, while economic growth resilience drove "high returns." Matejka warned that in contrast, in previous cycles, in the 12 months before the start of loose policy, the index only rose by an average of about 4%.

Kostin of Goldman Sachs stated that given that the market has already priced in the extent of loose policy, historical analysis may be unreliable in the current situation. Derivatives traders expect the Fed to ease by over 200 basis points by May Kostin said, "If the market reflects a limited impact of the Fed's loose policy because the economy proves to be resilient, then despite rising bond yields, US stocks will still rise. Conversely, if the market believes that the Fed will further ease policy due to deteriorating economic data, then even if bond yields fall, US stocks will be in trouble."