The Fed's first rate cut of the year has boosted Wall Street's optimism. Strategists are betting on a continuation of the bull market, although some are warning of correction risks in the technology sector.

At a meeting on September 17, the Fed lowered the key rate by 0.25 percentage points and outlined the possibility of two more cuts before the end of the year. Chairman Jerome Powell called the move a "risk management measure" aimed at mitigating the slowdown in the labor market, Yahoo Finance writes. The regulator's decision was the catalyst for the rally: all three key indices - Dow Jones, S&P 500 and Nasdaq - hit all-time highs on September 18.

What's the market sentiment

"Historically, a Fed rate cut when the market is near record levels has led to further gains in stocks, although not in a straight line," notes Keith Lerner, chief market strategist at Truist. Since the 1980s, a Fed rate cut with the S&P 500 near its high has been followed 90% of the time by a rise in stocks over the next year, Yahoo Finance points out, according to his data.

Lerner elaborates, "Fed policy is only one factor. But historically, markets have responded positively to rate cuts outside of recessions, especially if corporate profits remain robust."

Strategists at Wells Fargo, Barclays and Deutsche Bank have raised their forecasts for the S&P 500 in recent weeks. They cite solid corporate earnings, the artificial intelligence investment cycle and a softer Fed policy as drivers of share growth.

The Bank of America survey also confirms optimism: the share of equities in fund managers' portfolios reached a seven-month high.

However, there are more subdued assessments. Citi strategist Scott Hronert points out that the index has already hit its target level of 6600 points, which was anticipated by the end of the year. Hronert considers U.S. stocks "fairly valued" and believes the third-quarter reporting season will be the next key test for the market.

Analyst Mark Newton of Fundstrat warns: the short-term risk/return ratio for the S&P 500 looks "unattractive." He points to declining market breadth and signs of Nasdaq 100 fatigue, which could signal a correction in the technology sector before new growth.

Analyst Julian Emanuel of Evercore ISI has a similar view: he says volatility in the tech sector "can only go up" in the near term. However, in the long term, he maintains his forecast of an AI-supported bull market and sees a target for the S&P 500 of 7,750 points by 2026, about 17% above current levels.

Thus, investors are focused on a scenario that JPMorgan calls "jobless growth." Weakness in employment, they believe, will prompt the Fed to further ease policy, a rate cut will support stock valuations, and slowing wage growth will improve corporate margins. As analyst David Costin of Goldman Sachs noted, "a cooling labor market is a tailwind for corporate profits if all else remains equal."

Context

Despite the optimism after the Fed rate cut, investors continue to consider external risks. The focus is on the upcoming conversation between US President Donald Trump and Chinese President Xi Jinping, the key topic of which will be the fate of TikTok. According to Investing.com, this will be the leaders' first call in three months and a potential step towards their meeting at the summit in South Korea.

The situation around TikTok is important primarily for the technology sector, which remains the main driver of the current bull rally. The U.S. Congress is demanding the sale of the app's U.S. division or its blocking, but Trump has repeatedly extended the deadline, citing the popularity of the platform.

As noted by The Wall Street Journal, TikTok in the US may come under the control of a consortium of investors (Oracle, Silver Lake and Andreessen Horowitz). However, the details of the deal and the extent of China's influence remain open questions - which means the technology sector could face volatility despite the overall positive backdrop in the markets.

This article was AI-translated and verified by a human editor

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