Quick Look:
- Fundstrat predicts a potential 5% surge in the S&P 500 within the next week.
- Expect a September rate cut by the Federal Reserve following no rate cut in July.
- Past Fed meetings have led to stock market rallies, supporting the 5% surge prediction.
- A rate cut could boost the housing market and other sectors by making borrowing cheaper.
- A 5% rally could reclaim recent losses and set new record highs, signalling renewed investor confidence.
According to a Wednesday note from Fundstrat, investors should brace themselves for a potential 5% surge in the S&P 500 within the next week. This anticipated explosive rally is closely tied to the outcome of the Federal Reserve’s Federal Open Market Committee (FOMC) meeting. It suggests that a pivotal shift may be on the horizon.
Fed Signals and Market Reactions
Despite the Federal Reserve not cutting interest rates at the recent July FOMC meeting, expectations are set for a signal in September. The firm anticipates that the Fed will likely indicate an impending rate cut when they reconvene. Fundstrat’s Tom Lee elucidates that there is a strong likelihood of a September rate cut by at least 25 basis points. While the bond markets have already priced in this anticipated cut, equity investors are awaiting the Fed’s confirmation. Equity investors will be thoroughly convinced of the impending rate cut only with this confirmation.
The impact of this anticipated announcement is expected to be significant. History has shown that Fed meetings often act as a catalyst for stock market rallies.
In the past two years, stocks have frequently rebounded with gains as high as 5.5%. The median increase in the five days following a Fed meeting has been 3.4%. This historical trend bolsters the confidence of analysts like Lee. He foresees a risk-on rally that could drive the S&P 500 up by 200-300 points in the coming week.
Historical Context and Market Dynamics
The confidence in a strong rally post-Fed meeting is not unfounded. Looking at past performance, the S&P 500 has demonstrated resilience and a propensity to bounce back robustly after periods of decline heading into a Fed FOMC meeting. For instance, the Nasdaq 100, having faced a near-10% correction in recent weeks, sets the stage for a substantial recovery. Investors are keenly watching for signals from the Fed confirming the anticipated rate cut, setting off a positive market activity domino effect.
Economic Implications of a Rate Cut
While a 25 basis point cut might appear modest, its economic ramifications are far-reaching. One of the immediate benefits would be seen in the housing market. Lee points out that due to market uncertainties, the current excess spread of 30-year mortgage rates to 10-year Treasury yields could narrow significantly. Historically, this spread could shrink from 270 to the 50-year average of 170 basis points, making mortgages more affordable and stimulating housing market activity.
The benefits extend beyond housing. Even incremental rate cuts could alleviate slowdowns in other critical sectors, such as durables and the automotive market. These cuts could spur consumer spending and investment by making borrowing cheaper, providing a much-needed boost to the broader economy.
Potential Market Outcomes
Should the S&P 500 rally by 5%, it would reclaim its recent losses and set new record highs. This prospect is tantalizing for investors who have weathered the recent market volatility. A surge of this magnitude would signal renewed investor confidence and could pave the way for sustained market growth in the latter part of the year.
Looking Forward
As we anticipate the Fed’s September meeting, all eyes will be on the economic indicators and policymakers’ signals. The expected rate cut is more than a mere adjustment of numbers; it represents a strategic move to sustain economic growth amidst global uncertainties. Investors and analysts alike will be keen to gauge the Fed’s commitment to supporting the economy through these uncertain times.
The stock market stands on the brink of a potentially significant rally, driven by the anticipated actions of the Federal Reserve. With historical trends favouring a post-FOMC surge and tangible economic benefits from a rate cut, the coming week could be a pivotal period for investors. Whether the market will see a 5% increase remains, but the indicators point to a promising upward trajectory.
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