Interest rate cut expectations outweigh economic concerns! Surveys show: US stocks are expected to end the year strongly

According to the latest Markets Pulse survey, the U.S. stock market is expected to shake off the impacts of inflation risks and weak employment prospects, ending the year with upward momentum. In a survey conducted from September 5 to 10, two-thirds of the 116 respondents indicated that the S&P 500 index will continue to rise by 2025, with most expecting that signals of further interest rate cuts from the Federal Reserve before the end of the year will drive the index higher.

The non-farm payroll data released last week came in significantly below expectations, catching traders off guard. This data has cast a shadow over the U.S. economy, prompting bets that the Federal Reserve will cut rates three times this year, starting from September 17. At the same time, the weak data has reignited discussions about the possibility of a further 50 basis point rate cut by the Federal Reserve next week.

What is the main reason for the U.S. stock market to rise before the end of 2025?

Matt Maley, Chief Market Strategist at Miller Tabak & Co, stated, "As long as the rate cuts are modest and gradual, this view is reasonable. Wall Street would be very pleased to see this. However, if the rate cuts are too large, it would signal a significant slowdown in economic growth, which is not good for the currently expensive stock market."

Economic Concerns Persist

J.P. Morgan strategists warned that if policymakers cut rates as expected next week, this action by the Federal Reserve could dampen investor enthusiasm. This would mirror last year's situation when policymakers lowered rates by 50 basis points, yet the S&P 500 index still fell by 0.3% on that day as market concerns about the economy gradually spread.

Analysis from Markets Live shows that when the Federal Reserve cuts rates, regardless of the initial reaction, the stock market typically rises in the following week and month.

However, economic concerns still linger. Less than one-fifth of respondents believe that a rebound in economic data will be a catalyst for a stock market rise.

Among the few investors who expect the stock market to decline for the remainder of the year, the prospect of stagflation in the U.S. outweighs other risks such as declines in tech stocks or tariffs imposed by President Donald Trump.

What is the main reason for the U.S. stock market to decline before the end of 2025?

Michael Bailey, Research Director at FBB Capital Partners, stated, "The economy is facing a relatively mild stagflation scenario. My judgment is that inflation will rise slightly to a low single-digit level, while the unemployment rate will gradually worsen. However, true stagflation is just a step away from a full-blown recession, and a full recession is difficult to put back in Pandora's box."U.S. Stocks Expected to Outperform U.S. Bonds

So far, data shows that the U.S. economy is not too cold, but it also lacks strong resilience. Despite a stagnant job market and a struggling real estate sector, economic survey reports indicate that manufacturing and services are improving.

At the same time, consumers appear to be stable, especially as the prospect of interest rate cuts helps increase the likelihood of a soft landing, creating a favorable environment for the stock market.

Morgan Stanley analyst Mike Wilson stated on Monday: "The stock market's tolerance for a weak labor market depends on whether the monetary policy response is sufficient to offset growth risks. Given that the Federal Reserve is still focused on the possibility of inflation, and while labor data is underperforming, it has not reached an 'extremely bad' level, there remains uncertainty about how much the Fed can cut rates."

In the coming month, which asset will have higher risk-adjusted returns?

Respondents expect that in the coming month, the risk-adjusted returns of stocks will be higher than those of bonds. There is a divergence among respondents regarding whether the yield on the U.S. 10-year Treasury will rise or fall in the coming weeks. However, most respondents believe that due to ongoing impacts from inflation, fiscal concerns, and the erosion of the Federal Reserve's independence, the yield curve will further steepen this year