Dow Jones, S&P Equal Weight, Gold all hit new highs, "50 basis points rate cut" expectations are at their peak!

Since last Friday, the market's expectation of a 50 basis point rate cut has been rising continuously, driving funds into industries sensitive to the economic cycle. The Dow Jones Industrial Average, S&P 500 and other weighted indices, as well as gold, have all hit historical highs.

On Monday, the S&P 500 index rose slightly, but its equal-weight version rose by 0.7% to hit a historical high; the Dow Jones Industrial Average set new intraday and closing highs; spot gold continued to hit historical highs, briefly approaching $2590 during trading.

At the same time, the performance of tech giants dragged down the Nasdaq 100 index.

This week, the Federal Reserve will make its final decision, initiating its first rate cut since 2020. Currently, Wall Street is betting that the Fed will aggressively cut rates by 50 basis points at this week's meeting, with traders seeing this possibility at around 64%.

The expectation of a "50 basis point rate cut" is at its peak!

The main factor driving the market's rising expectations is the recent weakness in U.S. economic data. Job growth in August was below expectations, and the data for July was also well below expectations, raising concerns about an economic recession. At the same time, the overall inflation rate in the U.S. has dropped to 2.5%, close to the Fed's target, providing room for rate cuts.

Andy Brenner, Managing Director of International Fixed Income at NatAlliance, said, "This will be a very difficult decision, but I believe the Fed should cut rates by 50 basis points." "In fact, I think they should have acted in June and July." He expects that the retail sales data to be released on Tuesday will be weak, further supporting a larger rate cut.

Economists at Morgan Stanley also share the same view, reiterating last week that they expect the Fed to cut rates by 50 basis points this week.

In addition, according to a report by Wall Street News, Greg Ip, a senior central bank reporter for The Wall Street Journal, based on the current economic situation, believes that the need for further rate cuts by the Fed is becoming increasingly apparent, calling for a 50 basis point cut. CNBC reporter Carl Quintanilla commented, "The opinion leaders have spoken!"

However, not everyone believes that the Fed will cut rates significantly, as some experts think that Fed officials may remain cautious, as a significant rate cut could be interpreted by the market as a signal that the Fed is concerned about the economic situation Subadra Rajappa, the head of interest rate strategy at the American socio-economic consulting firm Societe Societe, believes that the Federal Reserve is inclined to meet market expectations that have already been digested, hence the greater likelihood of a 25 basis point rate cut.

More Important: Economic Conditions?

On the eve of the Federal Reserve's decision, many institutional strategists have expressed that, compared to the magnitude of interest rate cuts, the impact of the health of the U.S. economy on the stock market is more crucial.

Led by David Kostin, strategists at Goldman Sachs Group stated that given the importance of economic growth prospects over the speed of rate cuts themselves, the upside potential for stock valuations may be limited at present. They wrote in their report:

"Although some investors believe that the pace of Fed rate cuts will be the key determinant of stock returns in the coming months, the trajectory of economic growth is actually the most important factor determining stock performance."

Callie Cox from Ritholtz Wealth Management commented:

"Unless there is a major unforeseen event, we will definitely see some degree of rate cut this week, and the economic impact of a single rate cut - whether it's 25 basis points or 50 basis points - may be insignificant.

The path and magnitude of rate cuts over the next year or so are what truly matter."