Not everyone is convinced that the Federal Reserve will cut interest rates in September, despite prevailing market expectations. The ongoing debate about the Fed’s potential rate cut reflects broader uncertainties in the financial landscape.
Pat Reilly, senior director of Americas analytics at FactSet, has pointed out that while recent U.S. economic data supports the idea of a rate cut, it doesn’t necessarily mandate one. Reilly also highlighted the political sensitivities surrounding such a decision, noting that a rate cut before the election could be perceived as politically motivated. Conversely, failing to implement a warranted cut could undermine the Fed’s perceived independence and credibility.
Despite these concerns, the CME FedWatch tool indicates a high probability of a rate cut, with the market assigning a 96% chance to this outcome for September. This high probability reflects widespread investor expectations, yet there are significant nuances in how this decision could impact markets and the economy.
Donald Hagan, chief investment strategist and co-founder of Day Hagan Asset Management, has analyzed historical patterns following the first rate cuts of previous cycles dating back to 1957. His findings suggest that while initial reactions to rate cuts are generally positive—often leading to an average gain of 14% in the S&P 500 over the subsequent year—this rise is often due to expanded price-to-earnings multiples rather than an increase in earnings. Hagan warns that with multiples already at the high end of historical ranges, further expansion might be limited, and the focus should shift to earnings performance.
Looking ahead, earnings expectations for the S&P 500 are high. The median forecast anticipates a 19% growth in third-quarter earnings and a 21% growth for the full year, with another 18% increase projected for the following year. However, these optimistic projections come with caveats. Despite favorable consumer credit conditions, companies like McDonald’s and Amazon are seeing cost-conscious consumer behavior and trading down, respectively.
Hagan remains cautiously optimistic about the stock market, noting that while current models on U.S. and international economic growth, inflation, and liquidity remain constructive, he is prepared to raise cash if these indicators turn bearish.
In recent market activity, U.S. stock index futures fell following a negative reaction to earnings reports from major technology companies, while Treasury yields declined. Key asset performances show the S&P 500 down by 0.58% over the last five days but up 16.48% year-to-date, and the Nasdaq Composite showing a 0% change over the past month with a 19.89% increase year-to-date.
Notable stock movements include a decline in Tesla shares due to lower-than-expected earnings and unclear updates on robotaxi plans. Conversely, Alphabet reported stronger-than-expected earnings and plans to increase staff for technology investments. AT&T’s shares rose after meeting earnings expectations and showing strong subscriber growth, while Visa’s stock fell due to slowing volume growth. Deutsche Bank’s shares dropped as the bank raised its credit-loss provisions outlook due to its commercial real estate exposure.
Upcoming economic data to watch includes the advanced trade report, flash manufacturing and service sector PMIs, and new-home sales. Additionally, a $70 billion auction of 5-year Treasury notes is on the agenda.
The employment cost index, scheduled for release next Wednesday, will be closely monitored. Gerard MacDonell from Front Harbor Macro Research anticipates a 1% quarterly rise in this index and notes that persistent high wage inflation could indicate that the labor market has not yet fully adjusted to unemployment rate changes.
In the broader context, the financial landscape continues to evolve with new and unexpected developments, such as Mattel’s new blind Barbie dolls and the 50th anniversary of “Sweet Home Alabama,” highlighting how diverse factors influence market perceptions and economic conditions.\