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Each fall, Wall Street strategists publish their most anticipated work of the year — year-ahead forecasts for the S&P 500.
And while the anticipation for this year’s crop is as high as any other year, there’s another type of outlook drawing even more attention for investors in 2023: forecasts for the Federal Reserve. Specifically, predictions on when the Fed will begin cutting interest rates in 2024.
On Monday, strategists at UBS made waves after telling Bloomberg they expect the Fed to cut rates by 2.75% next year, beginning in March. Currently, the fed funds rate sits in a target range of 5.25%-5.50%, the highest since 2001.
Goldman Sachs’ widely followed economics team led by Jan Hatzius said last week they don’t expect the Fed to begin lowering interest rates until the fourth quarter of 2024.
Ellen Zentner, Seth Carpenter, and the economics team at Morgan Stanley see the Fed cutting rates by a cumulative 100 basis points next year, beginning in June.
Marc Giannoni and the US economics team at Barclays don’t expect to see the Fed cut rates until December of next year. And in a notable contrast to most on the Street, Barclays sees another rate hike coming in January.
Next month, the Fed itself will release updated forecasts for interest rates in the year ahead, the so-called dot plot.
As of September, the Fed expected to raise interest rates another 0.25% in 2023 and cut interest rates by 0.50% next year. Data from the CME Group on Monday suggested investors now see just a 20% chance of another hike from the Fed this year.
And while there’s nothing new about Wall Street economics teams releasing forecasts just like their stock market strategist counterparts, we think there are two key reasons to call out the importance of Fed forecasts for next year, and why they are central to driving Wall Street’s overall consensus outlook.
First, there is essentially no disagreement: The Federal Reserve will cut rates in 2024.
Just as there was almost no disagreement at the end of 2022 on what 2023 would have in store for investors — a shallow recession followed by a rebound in the stock market — there is even more conviction around what 2024 will mean for interest rates.
This added confidence means that any surprises on the path interest rates take in 2024 will likely have an amplified impact on financial markets.
Second, the read-through for the stock market is complicated.
Lower interest rates result in higher stock prices, all else being equal. And while all else rarely is in the real world of money and markets, this logic says the Fed will be a friend to equities next year.
Rate cuts that come in response to a recession, however, pose a challenge in serving as a positive catalyst for stocks. Nick Colas, co-founder at DataTrek Research, noted last week that earnings for the S&P 500 fall by an average of 31% over six quarters during a recession, with a recovery back to pre-recession levels taking three years.
Now although profits are the ultimate long-term driver of stock prices, a decline in earnings does not necessarily result in a real-time drop in stock prices. But it becomes more challenging to tell a positive story about the stock market with the economy in a downturn.
Which is why next year’s outlooks for the Fed have usurped S&P forecasts as the biggest story for 2024 — they are essentially one and the same.
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