JPMorgan says Fed rate cuts won’t be the rocket fuel for stocks some expect

Chair of the Federal Reserve of the United States Jerome Powell speaks during a Senate Banking, Housing, and Urban Affairs Committee hearing on the Semiannual Monetary Policy Report to Congress at the U.S. Capitol on July 9, 2024 in Washington, DC. Powell in earlier remarks was quoted, “we want to be more confident that inflation is moving sustainably down toward 2% before we start the process of reducing or loosening policy.”

Interest-rate cuts are on the horizon, but investors who think this will generate a fresh dose of equity momentum could be mistaken, JPMorgan said.

In a new research note, JPMorgan strategists led Mislav Matejka said the Federal Reserve’s eventual rate cuts will be at least partially in response to a slowing economy, which could neutralize the positive effect on stocks.

“Fed will start easing, but more in a reactive way and as a response to weakening growth — this might not be enough to drive a next leg higher,” strategists led by Mislav Matejka wrote on Monday.

Additionally, JPMorgan wrote: “We are not out of the woods yet, September has seasonally been a challenging month for equities.”

The firm’s view stands in contrast to more bullish forecasts held by those who think a post-rate-cut rally is in the cards.

For instance, one Wells Fargo analyst recently indicated that equities are bound for a rally not seen in three decades once Fed policy eases.

According to Paul Christopher, head of global investment strategy, today’s market has strong parallels with that of 1995 — and with the Fed cutting proactively amid stable GDP strength, further upside looks likely.

Meanwhile, veteran strategist Jim Paulson suggested that the Fed’s pivot would open the door to a “brand new bull market.”

“They opened up a lot more positive forces for the stock market that just haven’t been there,” he said, speaking after Fed Chairman Jerome Powell confirmed that interest rate cuts were likely during last month’s Jackson Hole Symposium.

Once the Fed cuts, these forces include accelerating monetary growth and falling bond yields, propelling private sector confidence higher, Paulson said.

Friday’s nonfarm payrolls report will be the next major input for the Fed, which is currently expected to cut rates by 25 basis points at its late-September policy meeting.

An especially weak report could revive cries for a deeper rate cut in September — possibly 50 basis points — as well as an accelerated pace of cuts heading into the November election and year-end.