The Federal Reserve last week initiated a new round of monetary easing, conveying its intent to support economic expansion and stabilize the labor market through a more aggressive 50 basis point cut.
After a brief surge driven by the interest rate decision, the U.S. stock market seems to be waiting for more confidence amidst fluctuations, as the market has largely digested the policy benefits.
The current focus of external attention is whether the slightly more than expected policy strength can successfully achieve the goal of a soft landing for the U.S. economy, which is also key to the Federal Reserve officials' decisions on the future direction of monetary policy.
The Fed's view on the economic outlook is similar to the information revealed by the latest dot plot, indicating a significant divergence within the Fed on future economic and monetary policies.
On Monday, several regional Fed officials expressed that the current policy is exerting too much pressure on the economy amid receding inflationary pressures and rising labor market risks.
Chicago Fed President Goolsbee stated that inflation and unemployment are close to the Fed's targets, "If we want a soft landing, we can't fall behind the curve."
Since the second half of the year, there have been signs of loosening in the labor market, with the 4.2% unemployment rate in August at the median level that Fed policymakers consider consistent with stable inflation.
Atlanta Fed President Bostic stated that he believes the economy is approaching the "normal" level faster than he expected, and monetary policy should also be adjusted from the current restrictive policy stance.
"Last week's 50 basis point rate cut is an appropriate way to start this process.
Progress in cooling inflation and the labor market is much faster than I imagined at the beginning of the summer."
Minneapolis Fed President Kashkari commented to the media that he agrees that a 50 basis point rate cut is appropriate, although he could also support a 25 basis point cut.
Kashkari believes that two more 25 basis point cuts may be needed by the end of the year, as the balance of risks has shifted from higher inflation to further weakening of the labor market, and even after the rate cut, the benchmark interest rate range of 4.75% to 5% is "still high."
From the latest statements, although the Fed has reached a consensus that monetary policy is too tight for the economic situation, debates are emerging about how quickly to return to a neutral interest rate level that neither stimulates nor restricts the economy in the future and what this level might be.
First Financial Daily reporters noticed that the quarterly economic outlook shows a long-term federal funds rate of 2.9%, but the distribution is highly dispersed.
Bostic stated that the issue of (neutral interest rates) is a topic of "intense" debate among a group of policy makers with a wide range of opinions, with a considerable degree of divergence.
History: A soft landing will drive a new round of market trends.
For optimistic investors, historical data shows that if the Fed achieves a soft landing for the economy, it will bring a new round of substantial returns.
According to the performance of the U.S. stock market during the easing cycle compiled by Evercore ISI, since 1970, as long as the economy avoids a recession, the S&P 500 has risen by an average of 18% per year after the first rate cut.
Lower interest rates will help the stock market in several ways.
The reduction in borrowing costs will increase economic activity, thereby enhancing corporate profits.
Lower interest rates will also reduce the returns on cash and fixed income, reducing their competition as investments against stocks.
The benchmark 10-year U.S. Treasury yield has fallen by about one percentage point since April, to 3.7%, and lower interest rates also mean that future corporate cash flows are more attractive, which tends to push up valuations.
Matthew Miskin, co-chief investment strategist at John Hancock investment Management, said: "At this stage, stock valuations are quite reasonable.
As further growth in valuations is expected to be limited, earnings and economic growth will be the key drivers of the stock market."
According to data from the London Stock Exchange IBES, net profits of the S&P 500 are expected to grow by 10.1% in 2024 and by 15% next year.
There are signs that this monetary policy shift has already gained the support of funds.
Jim Reid, global head of macro and thematic research at Deutsche Bank, found that although the S&P 500 tends to be flat in the 12 months before the easing cycle, it has risen by nearly 27% during this period this time.
"You could say that the potential 'no recession easing cycle' gains this time are borrowed from the future.
It is certain that many investors are not deterred by high valuations and maintain a positive outlook on stocks."
Reid said in the report.
At the same time, rate cuts close to market highs often indicate a good omen for the stock market a year later.
Ryan Detrick, chief market strategist at Carson Group, said that since 1980, whenever rate cuts have occurred when the S&P 500 is less than 2% away from its historical high, the index has risen a year later, with an average increase of 13.9%.
UBS Global Wealth also expressed optimism for the future in a report sent to First Financial Daily reporters: "Historically, the stock market has performed well during periods when the Fed has cut interest rates and the U.S. economy has not fallen into a recession.
We expect no exception this time."
Whether market pricing is reasonable, many institutional strategists have said that the Fed has reserved such aggressive measures for when the U.S. economy is on the verge of a recession or facing an imminent crisis.
Some market views believe that the overvalued U.S. stock market may have already digested the benefits of easy monetary policy, making it more difficult for the market to rise further.
The recent rebound in defensive stocks indicates that many investors are still preparing for some risks.
Data pointing to an economic slowdown could lead to growth panic and scare investors - similar to the market's reaction to rising unemployment rates in early August.
Michael Hartnett, a strategist at Bank of America, said that the stock market has the risk of creating a bubble after the Fed's rate cut, and bonds and gold have become hedge tools against economic recession or a new round of inflation.
The star analyst suggested that investors should think twice before chasing the rise, rather than succumbing to the pressure of chasing the rebound.
Hartnett said that investors who feel they have no choice but to put more money into risky assets should consider alternatives to U.S. stocks.
Robert Pavlik, senior portfolio manager at Dakota Wealth Management, said that the upward space for the stock market brought by the decline in interest rates in the short term is limited.
"People are a bit nervous about the stock index rising by 20% in a year in an environment of economic cooling."
Societe Generale also recently warned that a large number of valuation indicators, including price-to-book and price-to-sales ratios, show that the U.S. stock market is far above the historical average at present, "The current level can be summarized in one word: expensive."
