The prospect of near-term interest rate cuts is bolstering the case for investors to remain bullish after a run in U.S. stocks that may soon be tested by upcoming corporate earnings reports and growing political uncertainty.
Expectations that the Federal Reserve will kick off its long-awaited rate-cutting cycle in September remained firm on Tuesday after Fed Chair Jerome Powell told Congress that the U.S. is “no longer an overheated economy,” suggesting that the case for easing monetary policy is growing stronger.
Rate-cut bets have fluctuated sharply throughout the year and have been only one of several factors—along with strong earnings and excitement over artificial intelligence—that have helped the S&P 500 rise about 17% year-to-date. Still, many investors believe increased clarity on when the Fed will begin easing monetary policy and how much it might lower rates in 2024 could provide a buffer to stocks if markets grow turbulent in coming months. The beginning of rate cuts will signal that “the Fed has the market’s back,” said Yung-Yu Ma, chief investment officer at BMO Wealth Management.
He expects the central bank to cut rates about six times over the next year. “We think that’s definitely a positive factor both for the markets and the economy,” he said. Investors late on Tuesday were factoring in an over 70% chance that the Fed will cut rates in September, compared with roughly 50% a month ago, according to CME FedWatch.
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