Good news is fully priced in, leading to bad news! Wall Street strategists warn: After interest rate cuts, the rise of U.S. stocks may come to an end
Wall Street strategists warn that if the Federal Reserve lowers interest rates as expected, the upward momentum of U.S. stocks may weaken. Although the S&P 500 is nearing historical highs, investor concerns about an economic slowdown could lead to a more cautious market sentiment. Morgan Stanley's Michael Wilson pointed out that the short-term risk lies in the contradiction between employment data and Federal Reserve policy. He still recommends buying on dips and predicts that the S&P 500 will rise to 7,200 points by 2026
According to the Zhitong Finance APP, top strategists on Wall Street have stated that if the Federal Reserve lowers interest rates as expected this week, the record rally in U.S. stocks may temporarily lose momentum. Strategists from Morgan Stanley, JP Morgan, and Oppenheimer Asset Management have warned that as investors shift their focus to potential economic slowdown issues, market sentiment may turn from optimistic to cautious.
Expectations of a Fed rate cut have provided the latest momentum for the S&P 500 index, which is currently close to its historical high. However, there are growing concerns that a 25 basis point rate cut by the Fed on Wednesday may not be sufficient to address the slowdown in the U.S. labor market. Investors are still assessing the impact of tariffs on inflation, which remains above the Fed's 2% target.
Michael Wilson from Morgan Stanley stated, "The short-term risk mainly lies in the contradiction between lagging and weak employment data and the Fed's response, which may not meet the market's 'demand for speed'." Nevertheless, he still recommends buying on dips, and his most optimistic forecast is that the S&P 500 index will rise by 9% to 7,200 points by mid-2026.
S&P 500 Index Hits New Highs
JP Morgan strategists noted that the U.S. stock market has ignored weak indicators to set multiple historical highs, and this trend may reverse once the Fed makes its first rate cut in 2025.
The JP Morgan strategist team led by Mislav Matejka stated, "Once easing policies are re-initiated, the stock market may temporarily become more cautious while also considering more potential downside risks, thus reassessing the current possibly overly optimistic stance."
These warnings contrast with the generally bullish sentiment towards the U.S. stock market. Driven by gains in large tech stocks, the S&P 500 index has risen 12% this year. Institutions including Deutsche Bank and Barclays have raised their year-end targets for the S&P 500 this month, citing strong corporate earnings and the AI boom.
John Stoltzfus, Chief Investment Strategist at Oppenheimer Asset Management, also stated that as long as the fundamentals of the U.S. economy remain resilient, any decline following a Fed rate cut may be limited in scale and duration.
He said, "If the Fed only cuts rates by 25 basis points as most expect, the market may experience a certain degree of decline due to this news."
