Why won’t a Fed rate cut be a boost for Wall Street in 2024?

RBC Capital’s Lori Calvasina became the latest strategist to raise the level at which the S&P 500 index will close in 2024, raising her forecast from 5,000 to 5,150 points.

However, by raising expectations for the benchmark this year, Calvasina actually offered a more dovish outlook for the stock in November 2023 than his team had set out.

“When we presented our 5,000-point target in mid-November, it represented an upside of approximately 10% from levels at that time,” Calvasina wrote. “Today, our price target of 5,150 points represents an 8% gain versus the index’s December 2023 upside, so it is fair to say “Our enthusiasm has diminished a little bit.”,

A market sentiment that comes and goes

The firm’s “higher but lower” approach focuses on market sentiment and the enthusiasm with which investors reacted to the Federal Reserve’s tone and forecasts in December.

The central bank’s forecast that interest rates will fall more sharply this year fueled a rally across asset classes, sending 10-year Treasury yields below 4% and sending the Dow Jones Industrial Average to record highs.

And then stocks faltered in 2024, posting their worst start to the year since 2016.

One Wall Street strategist described the market’s early struggles as a “hangover” from 2023, which saw the S&P 500 rise more than 20% and the Nasdaq rise more than 40%.

Connected:

Citing a widely followed sentiment survey from the American Association of Individual Investors, RBC noted that the recent increase in bullish sentiment points towards a flat market over the next three months and gains of close to 6% over the next 12 months. Points out. A few weeks ago, in mid-November, this survey suggested the S&P 500 would rise nearly 10% in 2024.

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What are the markets expecting from the Fed

And although the firm states that this indicator has been “rapid oscillation”This interpretation helps us focus on the key question that has faced investors in recent months: Are markets trying to anticipate, react to, or impose some kind of outcome on the Fed?

Keeping all other factors constant, low interest rates are beneficial for stocks. This argument points towards The market rally has largely been in anticipation of lower interest rates in 2024.

By this logic, the Fed’s December outlook reinforced investors’ belief that the bet was right all along.

The old adage that markets buy rumors and sell news may also help explain the modest decline we have seen since the December highs; Once the Fed informed us that they would be cutting rates, the boost that stocks got from that fact disappeared.

Article Originally written in English By miles udland, Head of News at Yahoo Finance.

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