Potential Federal Reserve Rate Cuts: Impact on the Stock Market

Historical Impact of Rate Cuts on the Stock Market

Historically, Federal Reserve rate cuts have led to reduced market volatility and influenced market expectations. The anticipation and timing of these cuts, as seen in past announcements, have significantly impacted stock market behavior, often aligning with broader economic scenarios and influencing investor sentiment.

"Sure. Okay. I know the market's been looking for a reduction in volatility as that elusive rate cut schedule comes out." --- (JPM, conference, 2024/06/12)

"The Fed most recently telegraphed three rate cuts in 2024, but last week's CPI print has lowered market expectations." --- (GS, earning call, 2024/Q1)

"That says that interest rate cuts will start in September. We will expect another one in November and December in the curve." --- (BAC, earning call, 2024/Q2)

"And the other thing I want to point out, because all of these questions about interest rates and yield curves and NII and credit losses, it's one thing to project it today based on what -- not what we think in economic scenarios, but the generally accepted economic scenario, which is the generally accepted rate cuts of the Fed." --- (JPM, earning call, 2024/Q1)

"Additionally, markets were focused on the potential timing and amount of policy interest rate cuts by central banks globally, as well as the potential outcomes of national elections." --- (GS, sec filing, 2024/Q2)

Sector-Specific Reactions to Rate Cuts

Financial institutions like JPMorgan Chase expect rate cuts to impact fixed income and foreign exchange sectors, with potential reductions in revenue and activity. Companies may cut back and reduce leases, while net interest income and capital sensitivity will be closely monitored.

"Moving to Markets, total revenue was $8 billion, down 5% year-on-year. Fixed income was down 7%, driven by lower activity in rates and commodities compared to a strong prior-year quarter, partially offset by strong results in securitized products." --- (JPM, earning call, 2024/Q1)

"You are going to have more companies cutting back. You are going to have less leases." --- (JPM, earning call, 2024/Q1)

"And I do think that having rates off the lower zero bound and a sort of more normal dynamic in global rates that not only affects the rates business, but it affects the foreign exchange business." --- (JPM, earning call, 2024/Q1)

"So clearly, it is true that empirically, we've behaved like very asset sensitively in this rate hiking cycle, and that has resulted in a lot of excess NII generation sort of on the way up in the near-term. But when we look at the fund's overall sensitivity to rates, we look at it through both like the [EAR type lens] (ph), the short-term NIR sensitivity, but also a variety of other lenses, including various types of scenario analysis, including impacts on capital from higher rates." --- (JPM, earning call, 2024/Q2)

Investor Sentiment and Market Expectations

Investor sentiment has remained resilient despite reduced expectations for Fed easing and persistent inflation. Equity markets have continued to rise, and corporate earnings are seen as crucial for market sentiment. Concerns about the federal deficit and inflation persist, but investor appetite for investment banking activities remains strong.

"ago. And even as the market reduced expectations for the pace and extent of Fed easing due to the stubborn inflation readings, the equity markets continued to move higher during the quarter. Investor sentiment continued its recovery with the bull bear spread maintaining its recent strong position." --- (SCHW, event transcript, 2024/04/15)

"Michael Grub: We received a question from James Amoroso who asks, what should the individual investor do with regard to the huge federal deficit and rising cost of servicing bad debt as interest rates continue to rise or hold steady? How should we invest to protect ourselves from this and inflation?" --- (JPM, event transcript, 2024/05/21)

"U.S. stocks have slid from their highs as inflation proves sticky. We think that makes Q1 corporate earnings results even more important for market sentiment now. Read more \ud83d\udc49 https://t.co/jnUqtEy1jU https://t.co/5PRBGV78De" --- (BLK, Twitter, 2024/04/23)

"Just give us a sentiment check of when you're talking to your corporate clients, like how resilient do you see the investment banking sort of trends and the sort of desire and appetite for corporates to engage in either DCM, ECM or M&A, large M&A activity as we look into sort of later in the year into the U.S." --- (MS, earning call, 2024/Q1)

"Now despite the influence of typical seasonal pressure to start the year coupled with atypically bullish, very bullish investor sentiment, Client cash balances have largely trended consistent with our expectations despite rates remaining higher than the Fed and the market predicted earlier in the year.And all indications support that we are in the very late innings of client cash realignment activity." --- (SCHW, event transcript, 2024/07/16)

Corporate Borrowing and Investment Trends

Corporate borrowing trends show a cautious approach with widening lending spreads and disciplined lending. Companies like Apple and Microsoft are focusing on strategic capital deployment and early investments. Boeing prioritizes maintaining an investment-grade credit rating, while JPMorgan Chase enhances corporate lending through dedicated capital and co-lending programs.

"I think that away from the leverage lending space and the broader C&I space, there was a moment a few months ago where I think in no small part as a result of banks generally anticipating this more challenging capital environment and sort of disciplining a little bit their lending, you are seeing a little bit of widening actually in those corporate lending spreads." --- (JPM, earning call, 2024/Q1)

"And, you know, given you're struggling to reduce your net -- your -- reach your net neutral cash position and your margins are sort of near highs, do you see ways to deploy capital more to spur replacement demand in your installed base either with greater device financing, more investment in marketing, more promotions." --- (AAPL, earning call, 2024/Q2)

"So obviously, investments are coming well ahead of the revenue contribution." --- (MSFT, earning call, 2024/Q3)

"And we tell them what we consistently said to everyone, the investment grade is the number one priority." --- (BA, earning call, 2024/Q2)

"2nd, we already have dedicated capital on our balance sheet that we put to work in direct loan format for our corporate borrowers. We are also developing a co-lending program to enhance the amount of capital we can put to work in this space." --- (JPM, event transcript, 2024/05/20)

Inflation Expectations and Stock Market Valuations

Persistent inflation pressures are expected to keep interest rates higher for longer, impacting stock market valuations. High valuations in growth stocks pose risks, while commodities act as a hedge against inflation. Market valuation drives client investment asset growth, and fixed income investments struggle during rising inflation.

"The stocks of these companies can have relatively high valuations. Because of these high valuations, an investment in a growth stock can be more risky than an investment in a company with more modest growth expectations." --- (MS, press release, 2024/04/22)

"We think the Federal Reserve and its developed market peers will have to keep interest rates higher for longer due to persistent inflation pressures." --- (BLK, Twitter, 2024/07/09)

"Commodities have shown resilience to bouts of inflation and have been a hedge for bonds and stocks, according to Goldman Sachs Research." --- (GS, Twitter, 2024/07/10)

"We continue to see good momentum in non-interest revenue as we benefited from double-digit client investment asset growth, both in North America and internationally, driven by net new client investment assets as well as market valuation. Expenses were down 4%, driven by the" --- (C, earning call, 2024/Q2)

"Fixed income investments are advantageous in a time of low inflation, but do not protect investors in a time of rising inflation." --- (MS, press release, 2024/04/22)

Economic Growth Implications of Rate Cuts

Rate cuts are expected to support a soft landing and improve economic growth, with equity markets near all-time highs. Stable rates have contributed to balanced growth, reflecting positive economic conditions.

"Markets continue to forecast a soft landing as the expected economic growth trajectory improves and equity markets remain near all-time highs.I am particularly encouraged by the ongoing advancements in artificial intelligence. Recently, our Board of Directors spent a week" --- (GS, earning call, 2024/Q2)

"And it would be my assumption that given rates have been more stable for quite some time now, it seems to reflect balance growth." --- (GS, earning call, 2024/Q2)