Leuthold Group's Chief Investment Officer warns of a "rate cut trap" as the stock market may face a "sell the fact" scenario

According to the Zhitong Finance APP, as the market generally expects the Federal Reserve to announce an interest rate cut this week, investors hope this step will boost the U.S. economy and stock market. However, Doug Ramsey, Chief Investment Officer of Leuthold Group, warns that this policy shift may bring unexpected consequences and could even exacerbate market volatility.In an interview, he pointed out that although investors almost view the interest rate cut as a "done deal," its actual stimulating effect on the economy may be limited.He believes that the interest rate cut may not effectively drive a recovery in manufacturing or unfreeze the real estate market, which has remained sluggish since the rate hikes in 2022. On the contrary, long-term U.S. Treasury yields may rise after the rate cut, as inflation pressures could accelerate again, ultimately leading to the opposite effect of what the rate cut intended.Ramsey emphasized, "The original intention of the rate cut is to stimulate weak sectors, but in some cases, the result may actually fuel already strong inflation."Ramsey compared the current situation to the period when the Federal Reserve first cut rates in 2007. In September 2007, the Federal Reserve began cutting rates while the real estate market had been declining since its peak in 2005, the labor market was weak, and inflation was above the central bank's target. Policymakers hoped that the rate cut would stimulate the real estate and employment markets, but the result was counterproductive, with the real estate and labor markets continuing to deteriorate while inflation unexpectedly rose.Although Ramsey does not believe the current market will repeat the 2008 financial crisis, he warns that a resurgence of inflation would still pose significant challenges.Especially since the pandemic, low-income consumers have been under pressure due to significant price increases. If inflation rises again, it could further squeeze household budgets and hinder new business investments, ultimately impacting corporate profits and stock market performance.Recent data has shown early signs: the prices component of the Purchasing Managers' Index (PMI) has risen, while new orders have stagnated.Historical experience shows that when prices rise without growth in new orders, the stock market often weakens. Although the S&P 500 and Nasdaq indices are still at record highs, this divergence may pose hidden risks.Jonathan Krinsky, Chief Market Technician at BTIG, reminds that if the Federal Reserve announces an interest rate cut as expected this week, the market may experience a "sell the news" scenario, where investors take profits after the event, triggering the largest decline since April.On Monday, the S&P 500 index rose 0.47%, the Nasdaq index rose 0.94%, both reaching new historical highs; the Dow Jones Industrial Average rose 0.11%.Ramsey pointed out that the forward price-to-earnings ratio of the S&P 500 index is currently at a historical high, a level that has never been seen during a Federal Reserve rate-cutting cycle.Leuthold Group predicts that the year-on-year growth rate of the U.S. Consumer Price Index (CPI) will rise to 3.5% by the end of 2025. Ramsey stated, "If inflation rises to 3.3% or 3.4%, and the Federal Reserve signals tolerance, it is almost impossible for the stock market not to be impacted."Although Wall Street has continuously raised corporate profit expectations over the past three months, providing some support for the market, any changes in inflation or policy expectations could become the trigger for market adjustments against a backdrop of high valuations