US stock investors await the Fed's rescue, top economists: this time may not work!

Mohamed El-Erian, Dean of Queen's College, University of Cambridge, and Chief Economist at Allianz, recently wrote that the main support for the US stock market is the market's confidence in technology stocks, the economy, and the Federal Reserve. However, two of these are currently weak, so US stock investors may not be able to rely on the Federal Reserve for help. Here are his views. Over the past year, investors in the US market have shown extraordinary ability to ignore domestic and foreign risks posed by the operation of the US and global economies, financial systems, and trade. This decoupling of risk from market sentiment is driven by three factors: confidence in the profit growth prospects of certain technology companies, widespread confidence in the exceptionalism of the US economy, and continued trust in the Federal Reserve's support for financial assets. However, two of these factors have recently come under pressure, making the sustainability of any optimistic outlook more dependent on the third factor. Many events over the past year have typically triggered stock market volatility and led to an overall downward trend. The possibility of an escalation in the Israel-Palestine conflict could further disrupt shipping and trade, and drive up oil prices. In addition, US trade protectionism is on the rise. As the US imposes more restrictions on technology-related exports, more countries are forced to navigate through an increasingly complex field of secondary sanctions. The US presidential election serves as a reminder that a new round of tariffs against allies and adversaries may come as early as next year. Meanwhile, in some major European countries, moderate center-left and center-right parties have been weakened in local elections. The market's ability to overlook these developments cannot simply be attributed to the old saying "the market is not the economy, and the economy is not the market." It should be said that the market's ability to "ignore everything" is influenced by the three factors mentioned above. The first factor is the increasing confidence of investors in certain technology companies, reflecting the impact of the artificial intelligence revolution and the high expectations it brings. This historic technological disruption is still accelerating. The direct impact is evident in the remarkable growth of US stocks. However, this growth is mainly driven by a few companies directly involved in new generative models, predictive models, and related hardware technologies. The market's fascination with these companies is not only understandable but also reasonable. They are at the forefront of a technological breakthrough that will fundamentally reshape what we do and how we do it. The products and services they introduce are expected to drive broad productivity gains, improving not only the prospects of certain companies but also the entire economy. While the reasons for optimism about these companies remain strong, the sharp rise in stock prices has sparked discussions about the need for a pullback. After all, this unrestrained enthusiasm could lead to costly bubbles, and the consequences of a bubble burst may not be limited to a single industry or economy. The second factor is the market's confidence in the continued exceptionalism of the US economy, which is also under pressure. Although overall consumer spending remains robust, low-income households and small businesses are under significant pressure. The performance of the US labor market is crucial as it relates to income, spending, and financial security The data is mixed, with some indicators starting to send warning signals, such as the overall unemployment rate. These developments make the monetary policy of the Federal Reserve more important. Investors generally assume that "the Fed has our back." This so-called "Fed put" typically means that any economic slowdown or market excessive volatility would trigger a rapid easing of monetary policy. Over the past two decades, the Fed's responses to various crises have reinforced this expectation. Is confidence in the "Fed put" still justified? The answer is yes, but only if the Fed can look beyond just focusing on quickly bringing inflation down to 2%. This means that a rate cut is needed in the next two months to avoid unnecessary damage to employment and the economy from overly tight monetary policy. In fact, overly tight policies could further weaken the first two factors, making it harder for the market to continue to shake off the ever-expanding sources of domestic and foreign uncertainties.