Has the stock market considered a rate cut?

The stock market has absolutely 100% priced in a rate cut. The market has been expecting a rate cut for more than a year and, in fact, is pricing in a soft landing and sustained economic growth. The question that needs to be answered is whether the market is mispricing a rate cut, and the answer is also yes. According to late-2023 estimates, the first interest rate cuts would happen now, and the FOMC is far from realizing that hope. This means that the market is preparing for a decline, which could be significant.

The FOMC won’t cut rates until mid-summer

The latest CPI data indicates that the FOMC will not cut rates until at least mid-summer. The CPI data is a leading indicator of the PCE price index, the Fed’s preferred tool for measuring consumer-level inflation, and it’s hot.

February CPI data shows headline and core data a tenth warmer than expected on a monthly and year-over-year basis, with year-over-year components accelerating. The year-over-year base stood at 3.8%, up from 3.7%, which will not give the Fed confidence that inflation will be tamed. At best, the committee will hold off while waiting for more data, and there isn’t enough time for the data to match market expectations for when the first cut arrives.

The market pushed back the timing of rate cuts and pushed it back again following the release of the consumer price index. The CME’s FedWatch tool says there is a 0% chance for a rate cut this month and only a 16% chance for a cut in May. The odds for the first cut are not appreciable until June, and there is a less than 50/50 chance for two by July. By comparison, just two months ago the market was expecting two cuts by June. The bottom line is that inflation is still high and interest rates are high; both are likely to remain so until mid-year, where the risk for markets lies.

Stock markets are counting on an economic turnaround mid-year. This pivot is centered on interest rates and the FOMC and highlighted by earnings forecasts. THE S&P500 NYSEARCA: SPY is expected to produce growth this year. More importantly, earnings growth is expected to accelerate sequentially over the course of the year, with the back half doubling the 6.2% gain in the front half. Most of the growth is expected in the fourth quarter, about 17% year over year, but it may not occur if rates are not cut.

Consumers are resilient: labor markets are strong

There were some signs of weakening in the February jobs data, but overall the data was solid. The robust job gains were offset by downward revisions that left the three months above the previous ten-year average. Unemployment has increased but remains low compared to history and at levels considered healthy in 2018-2020. Wages are also rising, by more than 4% year-on-year, strengthening the resilience of the consumer economy.

Consumer habits are changing, but spending remains strong and growth is present among major retailers, including Walmart, Costco Wholesale NASDAQ: COST, Hooks NYSE: KRAND The TJX Companies New York Stock Exchange: TJXThere is no reason for the Fed to cut rates and there is enough room to maintain tight monetary policy.

Technical Outlook: S&P 500 Index advances on inflation data ‘as expected’.

Some MSM outlets reported inflation data as expected and the S&P 500 index advanced. The market gained more than 1% at the session high, but showed resistance near the all-time high.

Resistance at all-time highs could be strong. While the all-time high doesn’t cap gains, the upside is limited because S&P 500 chart highlights include a 25% gain since November 2023 and divergent indicators. Divergent indicators are a sign of market weakness that often precedes corrections. At the current level, the index is trading more than 5% above its 2021 all-time high, the first and best target for solid support, and is set to fall.

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