Why Fed rate cuts won’t support Wall Street in 2024

RBC Capital’s Laurie Calvasina became the latest strategist to raise the S&P 500’s 2024 close, raising her forecast to 5,150 from 5,000.

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

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

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Market sentiments that come and go

The company’s “higher but lower” outlook focuses on market sentiment and the enthusiasm with which investors responded to the Federal Reserve’s tone and guidance in December.

The central bank’s forecasts that interest rates will fall more aggressively this year sparked a rally across asset classes, sending the 10-year Treasury yield below 4% and sending the Dow Jones Industrial Average to a record high.

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

One Wall Street strategist went so far as to call the market’s initial struggles a “hangover” after 2023, when the S&P 500 rose more than 20% and the Nasdaq rose more than 40%.

Connected:

Citing a widely popular sentiment survey from the American Association of Individual Investors, RBC said the recent rise in bullish sentiment points to market sluggishness over the next three months and growth of nearly 6% over the next 12 months. Just a few weeks earlier, in mid-November, this study predicted that the S&P 500 would rise nearly 10% in 2024.

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What do markets expect from the Fed?

And although the company notes that this figure was “fluctuates quickly”this interpretation helps us focus on a key question investors have faced in recent months: Are markets trying to anticipate, react to, or force any Fed outcome?

Holding all other factors constant, lower interest rates are good for stocks. This logic indicates that The market rally was mainly driven by expectations of interest rate cuts in 2024.

So the Fed’s December forecast simply reinforced investors’ belief that the rate was right all along.

The old cliché about markets buying rumors and selling news may also help explain the modest pullback we’ve seen since the December highs; Once the Fed told us they would cut rates, the momentum that that fact gave to stocks disappeared.

Article originally written in English To Miles Udland, Head of News at Yahoo Finance.

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