Why Fed Rate Cuts Won’t Boost 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 to 5,150 points from 5,000.

However, by raising expectations for the benchmark this year, Calvacina actually offered a more bullish outlook for the stock than what his team had set for November 2023.

“When we presented our 5,000 point target in mid-November, it represented a roughly 10% increase from levels at that time,” Calvacina wrote. “Today, our price target of 5,150 points represents an 8% upside from the index’s December 2023 close, so it is fair to say. “Our spirits are down a little.”.

Market sentiment that comes and goes

The firm’s “high but low” outlook 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 prediction that interest rates will be cut more aggressively this year fueled a rally in the asset class, sending the 10-year Treasury yield below 4% and the Dow Jones Industrial Average to a record high.

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

One Wall Street strategist attributed the market’s early struggles to a “hangover” from 2023, with the S&P 500 up more than 20% and the Nasdaq up more than 40%.

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

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What markets are looking for with the Fed

And although the firm points out that this has been indicative “Rapid Oscillating”This interpretation helps us focus on a key question facing investors in recent months: Are markets anticipating, reacting to, or trying to impose some sort of outcome on the Fed?

Holding all other factors constant, low interest rates are beneficial for stocks. This logic suggests that The market rally has largely been on expectations of lower interest rates in 2024.

By this logic, the Fed’s December outlook limited investors’ belief that this bet was always appropriate.

The old cliché that markets buy rumors and sell news may also help explain the modest pullback we’ve seen since December’s highs; Once the Fed informed us that they would cut rates, the boost this fact gave to stocks disappeared.

Clause Originally written in English by Myles Udland, Head of News at Yahoo Finance.

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