Loosening the Screws

The Federal Reserve officially cut interest rates, ending its two-and-a-half-year battle against inflation. While markets anticipated this move, there was still some uncertainty about the size of the cut before the September meeting. Ultimately, committee members decided that a 0.5% cut was appropriate. With this reduction and the seemingly strong economy, it is not surprising that the S&P 500 has reached a new high.

Some people are wondering why such an aggressive policy change was necessary. There have been minor issues with employment, but no real trouble to be found. Consumer spending looks resilient, and artificial intelligence is driving a wave of investment. In his press conference, Chairman Powell emphasized returning to normal policies. Simply put, inflation has dropped to a level where high interest rates are no longer needed. Recession fears do not seem to be driving this decision. However, monetary policy takes time to have an effect. Rates were high for a while, and the full impact remains unknown.

Corporate earnings should be a key focus in the coming months. Earnings estimates continue to look very strong through the end of 2024 and into 2025. There are concerns about slower revenue growth due to weaker pricing power. However, companies plan to offset this with lower costs and productivity improvements. Valuations are high for some of the largest companies, so it’s crucial they meet their growth targets. At the same time, the “average” stocks are looking to join the growth trend. So far, earnings growth has mostly come from the biggest companies, but this is expected to change soon, leading to broader participation.

The election is also approaching, and the race looks tight. Industries and companies tied to specific candidates are not showing a clear trend. Historically, market performance three months before an election has been a good predictor of the outcome. Typically, if the market is up, the incumbent party wins. The S&P 500 is currently up over 10% from the start of this period. Since this election cycle is unlike any other, we continue to take a cautious approach. We take comfort in the fact stock performance has historically been strong under all types of administrations. We are also prepared to make minor adjustments once the election results are in.


Thanks,
Preston May, CBE®
Research Analyst

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