Strategists warned of a pause in the rally after the Fed rate cut. What is their advice?

Leading Wall Street strategists said that bullish market sentiment may be temporarily replaced by a more cautious one. According to them, the expected rate cut by 25 basis points will not solve the problems of the labor market and inflation. The U.S. Federal Reserve will meet on September 16-17, and the regulator's decision may turn out to be the most divided in 40 years: some members of the Fed's committee are demanding deeper rate cuts, which increases the risks of volatility and divergence of monetary policy forecasts.

Strategists at Morgan Stanley, JPMorgan and Oppenheimer warned of a slowdown in the rally of U.S. stocks after the expected Fed rate cut this week, Bloomberg reports. The S&P 500 rally in recent weeks has been largely fueled by hopes of an easing of the regulator's policy, the agency adds. However, concerns are growing that a rate cut of only 25 basis points will not solve the problems of a weakened labor market and investors are shifting their attention to the threat of economic slowdown. Further uncertainty is created by the impact of the duties on inflation, which remains above the 2% target.

According to JPMorgan strategist Mislav Matejka, the market has so far turned a blind eye to weak macroeconomic data and continued to set records, but that could change after the first rate cut in 2025. "When easing kicks in, equities are likely to shift to a more cautious dynamic and factor additional downside risks into prices, effectively reassessing the current, perhaps overly complacent stance," Matejka said in a note cited by Bloomberg. JPMorgan's baseline scenario assumes a 0.5-1% rise in the S&P 500 index with a quarter-point rate cut and dovish statements from the Fed, or a continuation of the current level or even a 0.5% drop in the case of hawkish signals. If the regulator goes for a sharper rate cut - by half a percentage point at once - then the index may fluctuate from minus 1.5% to plus 1.5% - again depending on the Fed's formulations, the investment bank believes.

Oppenheimer chief investment strategist John Stoltzfus believes that even if the rally slows after the Fed's decision, the fall will be limited in scope and short-lived as long as the U.S. economy remains resilient. "If the regulator cuts the rate by only 25 basis points, as most are suggesting, the market may sag slightly on this news, as stocks have already been rallied to new highs in anticipation of such a move," he emphasized.

"The near-term risk is the tension between weak labor market data and the Fed's response, which may not match the market's 'need for speed,'" warned Morgan Stanley strategist Michael Wilson. Still, he recommended traders buy the S&P 500 on a drawdown if that happens. In his most optimistic scenario, Wilson believes the U.S. benchmark could rise another 9% to 7,200 points by mid-2026.

In trading on September 15, the S&P 500 rose by 0.4% to 6610 points, which became its new all-time high. Since the beginning of 2025, the index has added almost 12% thanks to the growth of securities of major technology companies. Against this background, a number of strategists, including Deutsche Bank and Barclays, raised their forecasts for the index in September, citing strong corporate reports and interest in AI, Bloomberg notes.

The US Fed meeting will be held on September 16-17. Market participants have little doubt that the regulator will resume rate cuts after a pause: a quarter percentage point cut is expected by 94.4% of traders, CME Group's FedWatch Tool shows. However, this week's Fed Policy Committee meeting will take place in a non-standardized environment, where not only rate expectations come to the fore, Barron's notes. The regulator will present updated short- and long-term forecasts for GDP, unemployment, inflation and the federal funds rate. But adding to the economic controversy are political tensions, questions about the regulator's independence and even the composition of the committee itself.

His vote this time could be the most divided in nearly 40 years, with some members pushing for a half-point cut, and they are likely to be joined by Donald Trump protégé Stephen Miran. A vote on his nomination will take place in the Senate on September 15, Barron's reminds us. The emergence of a "dovish bloc" could lead to three governors voting against a majority decision for the first time since 1988, the publication writes. Powell may try to hold onto a semblance of unity, as a disjointed outlook could increase market volatility and inflation expectations, Apollo Global economist Torsten Slack noted in Barron's outline. However, even temporary agreement could be called into question if the outcome of the meeting shows significant divergence in expectations within the rate committee for the end of 2025.

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