Mislav Matejka of JPMorgan Chase and his team noted in a research note sent to clients on Tuesday that the S&P 500 has surged nearly 30% since its low in October last year, largely due to the market's expectation that the Federal Reserve would cut interest rates in March this year, but now the market expects the timing of the rate cut to be significantly pushed back.
Specifically, during the S&P 500's decline in October last year, Wall Street initially expected the Fed to cut interest rates by 80 basis points. When the S&P 500 rebounded, the market's expectations for a rate cut were revised to 180 basis points in January. Now, the market's expectations for the Fed's rate cuts this year have been adjusted back to 80 basis points.
"The stock market is ignoring the recent change in rate cut expectations, which may be a mistake," the analysts wrote in a note, adding that corporate earnings would need to accelerate to fill the gap.
Fed funds rate futures and the S&P 500
In addition, JPMorgan Chase expects U.S. Treasury yields to be lower in the second half of the year, but inflation swaps will rise, which may further delay interest rate cuts. Combined with bond yields once again being lower than expected, this shows that "investors in the bond market do not appear to be fully aware of the potential negative impact that inflation may have."
AI-driven technology stocks push the S&P 500 to new highs in 2024. At the same time, the Federal Reserve's first interest rate cut is expected to be postponed from March to June. Still, some analysts predict there is less than a 50% chance of a rate cut in June given the latest inflation data.
The Matejka team further pointed out that they predict that the U.S. economy will grow in the second half of the year overall, but this does not mean that their profit forecast for 2025 will be raised.
In addition, they stressed that the market is showing worrying complacency about the downside risks of the US economy, and the current probability of a recession is only 7 percentage points, which is likely underestimated. The surge in cyclical and defensive investments has reached the level of the recovery period after the 2009-2010 global financial crisis, indicating the risk of potential over-allocation.
The team said, "The next time Treasury yields fall, we do not believe the stock market will react as positively as it did in November-December last year."
The article is forwarded from: Jinshi Data
