It’s finally here. The Federal Reserve is due to meet on Tuesday and Wednesday — and is widely expected to make its first rate cut since starting a hiking campaign in March 2022. Back then, the overnight lending rate was anchored near zero. now, it’s at 5.25% to 5.5%. It’s a much-anticipated meeting for investors who hope the start of monetary policy easing will boost earnings growth for companies – particularly interest-sensitive businesses – that have been grappling with high inflation and increased borrowing costs. But recent signs of slowing economic growth have investors fearing that the Fed may be forced to cut for the wrong reasons, a concern that has cast a shadow around the central bank’s meeting — especially as the S&P 500 closes in again at record highs. “To the extent that we cut interest rates … because deflation has progressed well, or maybe a little better than expected, maybe that’s very positive for equity markets,” said Binky Chadha, head of US equity and global strategy at Deutsche Bank . CNBC’s “The Exchange” on Thursday. “But if you’re making cuts because we’re worried about growth, that’s very bad for equity markets.” As it stands, stocks are moving higher ahead of the session, with the S&P 500 and Nasdaq Composite on Friday posting their best weeks of 2024. The Dow Jones Industrial Average gained more than 2%, while the S&P 500 is higher by about 4%. The Nasdaq Composite is higher by more than 5%. 25 or 50 basis points? On Friday, the CME FedWatch tool showed markets were divided over how big the rate cut would be. About 53% of traders see a cut of 25 basis points, while the remaining 47% expect a larger cut of 50 basis points. “If they cut by 50, that would indicate to me that the Fed was actually much more concerned about slowing the economy than making sure that inflation stays on this downward path that it’s on right now,” said Dave Sekera, chief of the USA. market strategist at Morningstar. “So if there was a 50 basis point cut, I think the market would really sell off that news.” Investors will also be watching to see what Fed policymakers signal in their summary of economic projections about future policy moves. FedWatch shows markets are currently pricing in a 1.25 percentage point drop in the Fed Funds rate through the end of 2024 to a range of 4%-4.25%. S&P Nears Record: Buy the Rumor, Sell the News? The stock’s performance heading into the session has Giuseppe Sette, co-founder and president of Toggle AI, worried that valuations are too high. He worries that stocks will rise heading into the central bank meeting, with investors likely to sell off the news afterwards. “I think we’re essentially living through the tops of this cycle. And next week will give another test of that top, which I expect to fail, which we’ll follow,” Sette said. BTIG’s Jonathan Krinsky noted that the S&P 500 will likely hit a new all-time high next week as it is less than 1% away from July’s record high. That development will make the post-Fed equity playbook “tougher” for investors, he said. But Morningstar’s Sekera said he advises investors to remain more exposed to value than growth stocks. He also sees small-cap stocks as a buying opportunity, while remaining underweight large-caps. Some individual sectors that seem attractive for strategic planning include communications and energy. Bill Northey of the US Bank Asset Management Group takes a more cautious approach. His firm downgraded US large-cap stocks. It also moved up to a neutral position on its core fixed income allocation from previously underweight. Separately, August retail sales data due on Tuesday are expected to show consumer spending nearly flat last month from a 1 percent rise the previous month, according to FactSet consensus estimates. Notable earnings results coming next week include food company General Mills, as well as Olive Garden parent Darden Restaurants. Quarterly reports from homebuilder Lennar and shipping company FedEx will provide further insight into the economy. Week Ahead Calendar All times ET. Monday, September 16, 8:30 a.m. Empire State Index (September) Tuesday, September 17 8:30 A.M. Retail Sales (August) 9:15 AM Capacity utilization (August) 9:15 am Industrial Production (August) 9:15 am Construction Production (August) 10 am Business Inventories (July) 10 a.m. NAHB Housing Market Index (September) Wednesday, Sept. 18 8:30 a.m. Preliminary Building Permits (August) 8:30 am Start of residency (August) 2 p.m. FOMC Funds Target Upper Bound Earnings Meeting : General Mills Thursday, Sept. 19 8:30 am Current Account (Q2) 8:30 am Continuing Jobless Claims (07/09) 8:30 AM Initial Claims (09/14) 8:30am Philadelphia Fed Index (September) 10 a.m. Existing Home Sales (August) 10am Top Indexes (August) Earnings: Lennar , FedEx , Darden Restaurants Friday, Sept. 20
