Source: Jin10 Data
Author: Zhu Yu
Morgan Stanley analysts said, "If the employment data weakens from now on, regardless of whether the Fed's initial rate cut is 25 basis points or 50 basis points, the market may trade with a risk-off sentiment."
Top Wall Street strategist says that the impact of the highly anticipated Fed rate cut this week on US stocks is not as significant as the impact of the health of the US economy.
The market generally expects the Fed to make its first rate cut in four years on Thursday morning, and investors are undecided between a 25 basis point or 50 basis point cut. Expectations of loose monetary policy and strong economic data up to now have driven the S&P 500 index up more than 30% since November last year, and investors are now evaluating whether the US can avoid an economic recession after years of high interest rates.
Mike Wilson of Morgan Stanley wrote in a report: "If employment 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 sentiment."
Wilson is one of the most famous bearish analysts until mid-2024. On the other hand, he said that if the employment situation improves, the Fed may cut rates by 25 basis points until the middle of 2025, which could further support the valuation of US stocks.
Analysts from Goldman Sachs and JPMorgan also warned that considering the uncertainty of the economic outlook, the importance of Fed policy rates to US stocks has decreased.
Goldman Sachs strategist David Kostin wrote in a report on September 13th, "While some investors believe that the pace of Fed rate cuts will be a key determinant of future US stock returns over the next few months, the trajectory of economic growth is ultimately the most important driving force for US stocks."
In the past two months, due to uncertain economic prospects, US stocks have experienced a greater degree of volatility. The upcoming US election is another recent risk.
In addition, signs of economic slowdown will hamper overly optimistic expectations of profit growth over the next few quarters. An index from Citigroup shows that in recent weeks, there have been more analysts lowering profit expectations than raising them.
Historical signals
The research team at JPMorgan, including Mislav Matejka, examined the historical response of the S&P 500 index to Fed rate cuts in search of clues.
The strategist stated that historically, the initial reaction of the US stock market to policy easing has been mild, "followed by significant performance differences depending on which type of growth outcome dominates."
He noted that rate cuts before an economic recession "are unsurprisingly" accompanied by a year-long decline in the benchmark index, while the elasticity of economic growth drives "high returns". Matejka cautioned that in contrast, in previous cycles, the index had only risen by an average of about 4% in the 12 months before the start of monetary easing.
Kostin of Goldman Sachs stated that given the market has already digested the extent of accommodative policies, historical analysis may be unreliable in the current situation. Interest rate traders expect the Fed to ease policy by over 200 basis points by May.
Kostin said, "If the market reflects the impact of the Fed's loose policy is small because the economy has proven resilience, then even if bond yields rise, US stocks will still rise. On the contrary, if the market believes that the Fed will further relax its policy due to deteriorating economic data, then even if bond yields fall, US stocks will be in trouble."
Editor/rice