The Fed's rate cut in September is a foregone conclusion. Will the narrative of a "soft landing" once again dominate the trend of US stocks?

According to the Zhitong Finance and Economics APP, as the Fed's rate cut is almost a certainty, investors are increasing their focus on economic data in the coming months, as they weigh whether the "soft landing" narrative that has been driving the US stock market in 2024 will continue. Fed Chairman Powell stated last Friday that the "time has come" to lower interest rates, which is more dovish than what many investors expected to hear at the Fed's annual meeting in Jackson Hole, Wyoming. A rate cut is highly likely to begin next month, with the market currently widely expecting the Fed to cut rates by 25 basis points at the monetary policy meeting on September 17-18. However, this statement is far from a signal to let down the guard. With the S&P 500 index already up 18% this year, stock valuations are high, and market participants will need to see continued evidence that the economy is heading for a soft landing, where inflation cools while economic growth remains resilient. According to LSEG Datastream, the forward P/E ratio of the S&P 500 index is currently 21, higher than the 19.6 in early August. The long-term average for this index is 15.7. Additionally, September has historically been the weakest month for US stocks, with the S&P 500 index averaging a 0.78% decline during this period since World War II, according to CFRA data. Alessio de Longis, Senior Portfolio Manager and Head of Investment at Invesco Solutions, said, "The market is hoping to hear news of the beginning of a rate cut cycle." However, "Is the Fed really concerned about the economy now? If so, perhaps the excitement about the rate cut cycle should be viewed from a different perspective." History shows that in the context of strong economic growth rather than a sharp economic slowdown, the stock market tends to perform much better when interest rates are cut. Evercore ISI strategists stated that since 1970, the S&P 500 index has averaged an 18% increase in the year following the first rate cut in a non-recession period. In contrast, during economic recessions, the benchmark index has only risen by an average of 2% per year after the first rate cut. Upcoming important data releases include two monthly inflation reports: the Personal Consumption Expenditures (PCE) Price Index on August 30 and the Consumer Price Index (CPI) on September 11. More signs of economic weakness could once again disrupt the stock market and drive market expectations of a 50 basis point rate cut next month. Futures data shows that before Powell's speech, the probability of a 50 basis point rate cut in September was around 29%, but it briefly rose to 36%. As of the time of writing, this probability stands at 34.5%. The market has fully priced in the Fed's rate cut in September Rick Rieder, Chief Investment Officer of Global Fixed Income at BlackRock, wrote in a report last Friday: "The Federal Reserve will ease monetary policy in a situation where the economy is not particularly weak (inflation remains above target), and it is still possible for it to significantly ease monetary policy to address any severe weakness." Quincy Krosby, Chief Global Strategist at LPL Financial, stated that a key factor in the stock market is whether interest rate cuts are due to slowing inflation or a weak labor market. "The market is hoping to enter an interest rate cutting cycle because inflation is decreasing," Krosby said. "The question remains whether we will see further deterioration in the labor market." Furthermore, the intense competition between Vice President Harris and former President Trump may also cause uncertainty before the November 5th election. "The long-term trend of the stock market is solid as a rock, any weakness presents an opportunity to increase exposure," said Andre Bakhos, Managing Director of Ingenium Analytics LLC. However, in the short term, "we will see volatility, unstable trends, because no one really knows what will happen after he (Powell) shows his cards."