The Federal Reserve is scheduled to convene on Tuesday and Wednesday, with widespread anticipation surrounding a potential interest rate cut, the first since its rate-hike campaign began in March 2022. At the start of this period, the overnight lending rate hovered near zero; it currently stands at 5.25% to 5.5%. Investors are eagerly awaiting this meeting, hopeful that a shift toward easing monetary policy will spur earnings growth for companies, especially those sensitive to interest rates, which have been grappling with elevated inflation and borrowing costs.
However, recent indicators of slowing economic growth have raised concerns among investors that the Federal Reserve may be compelled to cut rates for adverse reasons, casting a shadow over the meeting as the S&P 500 approaches record highs. "If we are cutting rates because disinflation has progressed well or better than expected, that might be positive for the equity markets," stated Binky Chadha, chief U.S. equity and global strategist at Deutsche Bank, on CNBC’s "The Exchange" on Thursday. "But if the cut is due to concerns about growth, that could be detrimental to equity markets."
Stock markets have witnessed gains leading up to the meeting, with the S&P 500 and Nasdaq Composite recording their best weeks of 2024 on Friday. The Dow Jones Industrial Average increased by over 2%, the S&P 500 rose by approximately 4%, and the Nasdaq Composite climbed by more than 5%.
Investors are split on the scale of the anticipated rate cut. According to the CME FedWatch tool on Friday, about 53% of traders forecast a 25 basis point cut, while 47% expect a larger 50 basis point reduction. "A 50 basis point cut would suggest that the Fed is more concerned about the economy potentially slipping into a recession," remarked Dave Sekera, chief U.S. market strategist at Morningstar. He noted that such a significant cut might lead to a market sell-off.
Investors will also scrutinize the Federal Reserve’s summary of economic projections for future policy direction. Current market pricing, as indicated by FedWatch, expects a 1.25 percentage point decrease in the fed funds rate by the end of 2024, bringing it to a range of 4%-4.25%.
Giuseppe Sette, co-founder and president at Toggle AI, expressed concerns over high stock valuations preceding the meeting. He warned that the stocks might rally ahead of the meeting, only for investors to sell off following the announcement. "I think we are witnessing the peaks of this cycle," Sette observed, anticipating a retrace after next week’s events.
BTIG’s Jonathan Krinsky predicted that the S&P 500 might achieve a new all-time high next week, being less than 1% away from its July record, which could complicate post-Fed strategies for investors. Morningstar’s Sekera suggested investors should focus more on value stocks over growth stocks and identified small-cap stocks as a buying opportunity while advising an underweight position in large caps. He found sectors such as communications and energy particularly appealing.
Bill Northey of U.S. Bank Asset Management Group suggested a cautious approach, downgrading large-cap U.S. equities and moving to neutral on core fixed income allocation from an underweight position.
Additionally, August retail sales data, expected on Tuesday, will likely show little change from the prior month’s 1% increase, based on FactSet consensus estimates. Noteworthy earnings reports next week from companies like General Mills, Darden Restaurants, Lennar, and FedEx will offer further economic insights.
Week Ahead Calendar (All times ET):
Monday, Sept. 16
- 8:30 a.m.: Empire State Index (September)
Tuesday, Sept. 17
- 8:30 a.m.: Retail Sales (August)
- 9:15 a.m.: Capacity Utilization (August)
- 9:15 a.m.: Industrial Production (August)
- 9:15 a.m.: Manufacturing Production (August)
- 10 a.m.: Business Inventories (July)
- 10 a.m.: NAHB Housing Market Index (September)
Wednesday, Sept. 18
- 8:30 a.m.: Building Permits preliminary (August)
- 8:30 a.m.: Housing Starts (August)
- 2 p.m.: FOMC Meeting
- 2 p.m.: Fed Funds Target Upper Bound
- Earnings: General Mills
Thursday, Sept. 19
- 8:30 a.m.: Current Account (Q2)
- 8:30 a.m.: Continuing Jobless Claims (09/07)
- 8:30 a.m.: Initial Claims (09/14)
- 8:30 a.m.: Philadelphia Fed Index (September)
- 10 a.m.: Existing Home Sales (August)
- 10 a.m.: Leading Indicators (August)
- Earnings: Lennar, FedEx, Darden Restaurants
Friday, Sept. 20
