Analysts get bullish on US shares after Fed’s 50 basis point rate cut

While US share markets closed in the red yesterday after the Fed cut interest rates by 50 basis points, they are rallying today with the Dow Jones and S&P 500 index rising to a record high. Wall Street analysts are also getting bullish on US shares after the Fed’s big rate cut move.

Fed cut rates by 50 basis points

Fed cut its benchmark rates by 50 basis points yesterday which was the first rate cut since March 2020 when the US central bank cut rates to zero bound amid the COVID-19 pandemic.

The Fed began raising rates in March 2022 to contain rising inflation that it previously said was “transitory.” It raised rates by 25 basis points in March 2022 and by 50 basis points in May. In the next four meetings, it raised rates by 75 basis points each before lowering the pace of hikes to 50 basis points in December.

The US Central Bank raised rates four times in 2023 by 25 basis points each which lifted the Fed fund rates are 5.25%-5.50% – the highest since 2001.

Meanwhile, while US shares initially jumped after the 50-basis rate cut, they subsequently fell as markets took it as a sign of a worsening slowdown. However, markets have rebounded today and analysts see more gains ahead.

BMO raised S&P 500 target to Street high

BMO chief investment strategist Brian Belski has raised his year-end target for the S&P 500 by 500 points to 6,100, which is the highest among major firms and almost 10% above the average target for the world’s most tracked index.

“Much like our last target increase in May, we continue to be surprised by the strength of market gains and decided yet again that something more than an incremental adjustment was warranted,” said Belski in his note.

Notably, Belski did not raise his estimate of S&P 500 earnings and his target implies a PE multiple of 24.4x for the index. While Belsky admitted that the multiple is high, he said that it was comparable to the mid-90s which he believes is comparable to the current environment.

Other analysts also get constructive on US shares after Fed rate cut

Some of the other brokerages are also getting constructive on US shares after the Fed rate cut. Tom Essaye of The Sevens Report said, “Markets exist, for the near term, in an environment of 1) Easing Fed, 2) Slowing but “OK” economic data, 3) Generally solid earnings and 4) Positive momentum.”

He added, “As such, a continued grind higher in stocks over the near term shouldn’t be a surprise, even if that does stretch the absolute bounds of reasonable valuations.”

Data shows US shares do well after a Fed rate cut

Data compiled by Canaccord Genuity shows the S&P 500 index delivers an average gain of 18.6% gain one year after the Fed begins to lower rates – provided we don’t get into a recession.

JPMorgan also echoes similar views and said, “Over the past 40 years, the Fed has cut rates 12 times with the S&P 500 within 1% of an all-time high. The market was higher a year later all 12 times with an average return of around 15%.”

A section of the market is worried about a recession

The reason markets fell despite the 50-basis point rate cut yesterday was that usually such cuts are done when the economy is in a deep slumber. Veteran fund manager David Rosenberg believes that while the Fed’s rate cut has delayed a recession, it has not “derailed” one.

He said, “The base-case scenario is that we are in a soft landing as things currently stand. If you pay attention to the tone in Fed Chair Jerome Powell’s post-meeting press conference, the move was nothing more than a down payment, insuring that the soft landing, or the “goldilocks economy,” remains intact.”

Rosenberg however said that he does not believe in these “fairy tales” while adding that the FOMC (Federal Open Market Committee) suffers from “cognitive dissonance.”

Fed is not too perturbed about a recession

Meanwhile, Fed chair Jerome Powell is not too perturbed about a recession in the US. “You see growth at a solid rate and said, “I don’t see anything in the economy right now that suggests that the likelihood of a recession, sorry, of a downturn, is elevated.”

He added, “You see inflation coming down. You see a labor market that’s still at very solid levels. So, I don’t really see that now.”

Powell said, “We’re trying to achieve a situation where we restore price stability without the kind of painful increase in unemployment that has come sometimes with disinflation.”

All said, US shares seem to defy add odds of a recession in the short term and are rising to record highs with a broad-based rally.