After the Fed stops raising interest rates, will US stocks rise?

The Fed is about to pause its rate hikes, but that may not lead to a rebound in the stock market when it arrives.

The long-awaited moment when the Fed pauses its rate hikes is approaching, but it's unlikely to bring about a surge in the stock market.

The Fed has made progress in controlling inflation by raising interest rates to reduce demand for goods and services. Policymakers hope the inflation rate will continue to decline, but they don't want to cause too much damage to the economy, and it's still unclear how much damage the nine rate hikes launched in the past year will cause.

Rate hikes may end in June this year. CME data shows that the probability of the Fed not raising interest rates at that time is about 70% based on the trend of the federal funds futures market.

The FOMC minutes for March showed that members had considered pausing rate hikes last month, and even the futures market showed a 10% chance of a rate cut by the Fed in June.

How to trade?

Investors have been hoping for the Fed to hit the pause button since last year, but stock prices seem to have already reflected this.

If the data shows that the Fed's tightening policy is pushing the US towards a recession, this will put pressure on corporate profits, and the stock market may now decline.

As demand and inflation are hit in the short term, bond market rates should also fall, meaning that lower rates may now mean poor stock market performance.

Evercore strategist Julian Emanuel said: "Given the expected rate cut in July 2023, pausing rate hikes is likely to be a 'sell the news' phenomenon."

However, according to Evercore's data, the market tends to rise in the year after the Fed pauses rate hikes, with the S&P 500's historical average gain being 12%.

This time, this may still happen, but there may be some volatility and even a rapid decline in the early stages.

Buying stocks is not a bad idea, but now may not be the best time to buy heavily.