Fed Cuts in 2024 Could Pose Challenges for Stocks

Hugh Gimber, global market strategist at JPMorgan Asset Management, suggests that a potential cut in interest rates by the Federal Reserve in the coming year may not bode well for U.S. equity investors. Traditionally, stocks have experienced rallies upon receiving dovish signals from central bankers, as it indicates the possibility of lower borrowing costs amidst falling inflation. However, Gimber believes that a Fed rate cut in 2024 might coincide with a decline in corporate earnings, creating obstacles for stocks. He explains, “The reason the Fed cuts next year is not because inflation has smoothly reached its target, but rather because we start to see weaknesses in the growth outlook. This is not a positive scenario for equities, especially considering the current earnings projections.”

Conflicting Data Points

Analysts are predicting a 12% earnings growth for the S & P 500 as a whole in 2024. Simultaneously, interest rate markets are indicating a more than 55% probability of an interest rate cut in July 2024. According to data from CME’s FedWatch Tool, another rate cut is also expected by November of next year. Gimber finds these two data points contradicting each other, stating, “You have this disconnect at the moment: 12% earnings growth expected for next year and still the Fed expected to cut multiple times. Those things can’t both happen at the same time.”

Potential Catalyst for Stock Decline

Gimber anticipates that cracks in the growth outlook will become more evident during the third-quarter earnings season, leading to lower forecasts. He explains, “As we move through Q3 earnings season, analysts will start to revise down their 2024 figures.” While Gimber believes that certain sectors like autos, supported by a backlog due to supply constraints, may maintain their margins, he already sees weaknesses in industrial sectors like chemicals that could result in further downgrades by analysts.

Investment Strategies

Given this outlook, Gimber currently favors fixed income over equities. He highlights the income potential in bonds with record-high yields. The 10-year U.S. Treasury yield recently reached its highest level since 2007, following stronger-than-expected retail sales data. In terms of equities, Gimber recommends focusing on more defensive sectors that can withstand slowing growth. He points to the United Kingdom as an example, with higher exposure to energy, staples, and defensive characteristics. Additionally, he finds selective emerging market local currency debt attractive, particularly in countries like Brazil, Mexico, and South Africa, which still have room for rate cuts compared to developed markets.