Traders More Bullish on US Stocks as Fed Signals Rate Cuts in 2024

Surveys indicate that traders are increasingly optimistic about U.S. stocks. The survey revealed that 44% of respondents currently hold a bullish outlook, up from 32% in the second quarter.

The U.S. stock market has experienced several consecutive declines thus far in August, yet the S&P 500 index has still managed to achieve a 14% increase this year. Despite the Federal Reserve’s continuous efforts to combat inflation by raising interest rates, stocks have rebounded, and the U.S. economy has displayed resilience in 2023.

During a speech at the Jackson Hole Annual Meeting of Global Central Banks, Federal Reserve Chairman Powell stated that, in order to curb inflationary pressures and ensure the continued stability of the U.S. economy, the Federal Reserve is prepared to further raise interest rates if appropriate while maintaining a restrictive policy stance until the inflation rate reaches the target level of 2%.

The timing and drivers of potential interest rate cuts have become the focus of investors’ attention as economists and markets reduce their expectations for further interest rate hikes by the Federal Reserve. Bank of America analysts anticipate a rate cut by the Federal Reserve in December 2024, which would represent the slowest interest rate cutting cycle in history, with a monthly rate cut of 100 basis points.

Goldman Sachs Group predicts that the Fed may commence lowering interest rates in the second quarter of next year, as it aims to normalize the funds rate from restrictive levels once inflation nears the target and the economy remains out of recession. David Mericle, the U.S. economic analyst at Goldman Sachs, cautioned that there is no immediate urgency to cut and normalize interest rates, and warned of a “significant risk” that the Fed will maintain its benchmark interest rate without changes.

In July of this year, the Federal Reserve raised its benchmark interest rate by 25 basis points to a target range of 5.25% to 5.5%.

Last year, many investors expressed concerns that the Federal Reserve’s aggressive interest rate hikes would trigger a U.S. recession, as it aimed to cool the economy and control high inflation. However, U.S. unemployment has remained low this year, and the economy continued to expand during the second quarter.

Bank of America analysts highlight a critical question regarding whether the Federal Reserve needs to reduce interest rates during a recession, as rising expectations of a recession-free easing cycle create left tail risks.

Bank of America Global Research analysts caution against relying solely on recession-free rate cuts. They point out that the ghost of last year’s battle against inflation, increased data volatility, and macroeconomic uncertainty may hinder the Fed from cutting interest rates until an economic slowdown materializes.

If a recession were to occur, the Fed could reduce interest rates to stimulate the economy. However, market expectations for early interest rate cuts and high stock valuations suggest an unusual lack of investor concern about the necessity of easing policies, setting a high threshold for further increases in U.S. stocks.

Confidence has been on the rise, as indicated by Charles Schwab’s trader confidence survey, which demonstrates increasing optimism among traders regarding U.S. stocks. The survey found that 44% of respondents currently hold a bullish outlook, up from 32% in the second quarter. Meanwhile, 69% of Charles Schwab’s trader clients still believe that the U.S. economy may officially enter a recession, but this figure has decreased from 86% in the second quarter and 87% in the first quarter.

A senior strategist at JPMorgan Chase noted that the enthusiasm surrounding artificial intelligence has contributed to the rise of the U.S. stock market in 2023. However, the strategist emphasized that the artificial intelligence boom alone will not be sufficient to lift the U.S. economy out of recession, as it will take several years for the latest technology to have a significant impact on the economy.

On August 24, U.S. Treasury yields surged, with the benchmark 10-year U.S. Treasury yield reaching 4.241% after reaching a 16-year high earlier.

Nvidia shares reached a record high following the company’s report of quarterly earnings and revenue that surpassed analysts’ estimates. The company also raised its forecast, with executives anticipating a third-quarter revenue increase to $16 billion, marking a 170% year-over-year growth.

This represents the second consecutive quarter in which Nvidia’s financial results have exceeded expectations. The release of first-quarter data in May fueled investor interest in artificial intelligence, which emerged as a key market driver in the first half of the year. Interest in chip stocks propelled their value to surpass $1 trillion.

However, this was insufficient to boost the overall technology sector.

Regarding the outlook for technology stocks, Morgan Stanley analyst Erik Woodring revealed that, over the past four years, Microsoft had been the large-cap stock with the lowest holdings in institutional investment portfolios. However, in the second quarter, this position was overtaken by the iPhone maker.

Nevertheless, Apple stock holdings are currently at their lowest level since 2008, making it the most underowned large technology stock.

Investors have expressed concerns that Apple shares mayexperience a decline due to potential slower growth in iPhone sales and increasing competition in the smartphone market. However, there are still positive factors that could support Apple’s stock, such as its strong ecosystem, services revenue, and the potential for new product releases.

It’s important to note that stock market trends and predictions can change rapidly based on various factors, including economic conditions, company performance, geopolitical events, and investor sentiment. Therefore, it’s always recommended to conduct thorough research and consult with a financial advisor before making any investment decisions.