Investors are adjusting their expectations for when the Federal Reserve will begin cutting interest rates, with the current outlook pointing to only two rate cuts in 2024 compared to the initial projection of seven at the beginning of the year. Despite a market pullback in response to the recent inflation data, stocks remain resilient, with the S&P up about 8% year-to-date. Analysts believe that a change in market expectations for Fed policy is unlikely to disrupt the ongoing stock market rally, as easing measures are still anticipated.
Chief investment strategist Christopher Harvey from Wells Fargo emphasized that the Fed is expected to embark on a multiyear easing cycle, regardless of the timing or magnitude of rate cuts. Market bulls are optimistic about the limited impact high interest rates may have on corporate earnings or overall economic growth, with consensus estimates pointing to an increase in earnings growth in the coming months. Strategists anticipate a positive backdrop for economic growth, which could lead to broader earnings growth beyond the technology sector.
Economists are exploring the possibility of a “no landing” scenario, where economic growth accelerates while inflation slows, potentially resulting in fewer rate cuts than initially predicted. This scenario could be beneficial for the major indexes, highlighting a positive economic outlook and potential for broader earnings growth. While large-cap companies have shown preference among investors, smaller-cap stocks may face challenges related to the fluctuation in bond yields and rate cut expectations.