Since last Friday, the market's expectation of a 50 basis point interest rate cut has been increasing, driving continuous inflows of funds into industry sectors sensitive to economic cycles. The Dow Jones Industrial Average, S&P 500 equal-weighted index, and gold have all hit a historical high.

On Monday, the S&P 500 index slightly increased, but its equal-weighted version rose by 0.7%, reaching a historical high. The Dow Jones Industrial Average set new intraday and closing price highs. Spot gold continued to hit a historical high, briefly approaching $2,590.

At the same time, the Nasdaq 100 index fell due to the underperformance of tech giants.

This week, the Federal Reserve will make its final decision, marking its first interest rate cut since 2020. Currently, Wall Street is betting that the Federal Reserve will aggressively cut interest rates by 50 basis points at this week's meeting, with traders believing that the likelihood is about 64%.

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

The main factor driving the increase in market expectations is the recent weak US economic data. Job growth in August was lower than expected, and the data for July was also far below expectations, raising concerns about an economic recession. At the same time, the overall inflation rate in the US has dropped to 2.5%, close to the Federal Reserve's target, providing room for interest rate cuts.

Andy Brenner, director of international fixed income at NatAlliance, said, 'This will be a very difficult decision, but I believe the Federal Reserve should cut interest rates by 50 basis points.' 'In fact, I think they should have taken action in June and July.' He expects that the retail sales data to be released on Tuesday will show weakness, further supporting a larger rate cut.

JPMorgan economists also hold the same view. Last week, they reiterated their forecast that the Fed will cut interest rates by 50 basis points this week.

In addition, Wall Street sees it mentioned that Greg Ip, a senior Fed reporter for the Wall Street Journal, believes that the need for further Fed rate cuts is becoming increasingly evident, and he calls 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. Some experts believe that Fed officials may remain cautious because a significant rate cut could be interpreted as a signal that the Fed is concerned about the state of the economy.

Subadra Rajappa, Head of US Interest Rate Strategy at Societe Societe, believes that the Fed is more inclined to meet market expectations that have already been priced in, so the likelihood of a 25 basis point rate cut is greater.

Is the economic situation more important?

On the eve of the Fed's decision, several institutional strategists have expressed that the health of the US economy is more important for the stock market than the magnitude of the rate cut.

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

"Although some investors believe that the speed of the Fed's rate cuts will be the key determinant of stock returns in the coming months, the trajectory of economic growth is the most important factor determining stock market trends."

Callie Cox of Ritholtz Wealth Management said:

Unless there is a natural disaster, we will definitely see some degree of interest rate cut this week, and the economic impact of a rate cut, whether it is 25 basis points or 50 basis points, may be negligible.

The future path and magnitude of interest rate cuts in the next year or so are the most important.

Editor/Somer