Risk Appetite Floods Back Into Wall Street as Rate Cut Confidence Soars for Investors

It may not have been the cuts that some speculators had hoped for back in Q4, but the news that the US Federal Reserve were set to cut rates three times throughout 2024 helped to push all three major stock indexes towards new record highs following its March meeting.

The prospect of rate cuts will be music to the ears of risk-taking investors, with the prospect of greater confidence levels and stronger liquidity helping to drive markets higher.

Riding the wave of good news was the Dow Jones Industrial Average, S&P 500, and the Nasdaq Composite, all of which added posted healthy gains of between 0.2% and 0.7% as the anticipation of upcoming cuts grew.

Although the Fed opted to keep rates unchanged in March, new forecasts confirmed plans for three 25-basis-point rate cuts in 2024 in a move that improved optimism throughout Wall Street.

Federal Reserve Chair Jerome Powell also hinted that rate cuts will take place provided that the US economy continues to grow as expected, and downplayed the impact of the unexpected rises in inflation that took place in January and February. As a result, markets anticipate a 72% chance of a rate cut arriving by June.

The largely optimistic note saw Wall Street’s chip stocks perform exceptionally well, with Nvidia (NASDAQ:NVDA) soaring to yet further highs while the positive sentiment dovetailed for Micron Technology’s (NASDAQ:MT) stock which has now shown Q1 growth of 45% following an impressive earnings report.

Provided that the Fed’s anticipation of economic growth meets expectations, it’s likely that higher flows of investor optimism will manifest itself in Wall Street’s tech stocks and various riskier plays that would’ve seemed too hot to handle as recently as 2022. So, is it time for the good times to roll once more?

Winning the Battle with Inflation

Throughout 2022 and 2023, the economic landscape throughout the US was punctuated by a hawkish monetary policy from the Federal Reserve. Soaring inflation prompted by the post-pandemic recovery and supply chain squeezes throughout industries saw inflation peak at 9.1% in June 2022.

By late 2023, optimism began to grow that rate hikes may finally be over, and that cuts may be on the way as soon as Q1 2024.

However, January and February of the new year brought more concern. Inflation began to rise unexpectedly, causing more investors to fear that expectations over cuts may be short lived.

Despite this, Powell highlighted that recent inflation worries were likely down in part to ‘seasonal effects,’ and although the bank would take the available data seriously, it shouldn’t impact its transition into a more dovish stance.

"It certainly hasn't raised anyone's confidence; but I would say that the story is really essentially the same, and that is of inflation coming down gradually toward 2% on a sometimes bumpy path," explained Powell.

"We've got nine months of 2.5% inflation now. We've had two months of bumpy inflation; it's going to be a bumpy ride."

While the anticipation of cuts has seen investor sentiment become more positive on Wall Street, other investors have sought to move quickly in taking advantage of advantageous interest rates while they’re still available.

According to fund tracker EPFR, $22.8 billion has flooded into corporate bond funds in 2024 before anticipated rate cuts impacted yields. The data represents the brightest start to a year since 2019.

Big Tech Wins Investor Confidence

Wall Street’s brightening outlook saw US stock futures rally in the wake of the Fed’s March meeting.

Futures for the Dow Jones Industrial Average advanced 30 points, or 0.1%, the S&P 500 gained 0.2%, and the tech-oriented Nasdaq climbed 0.3% moving into the quieter Easter Weekend period for markets as investors began to bet on clearing skies over US stocks.

Crucially, this growing interest in the performance of US markets falls in-line with more bullish revisions of where indexes like the S&P 500 is likely to be by the end of the year.

Notably, John Stoltzfus, chief investment strategist at Oppenheimer, has raised expectations for the S&P 500 by 5% to a year ending benchmark of 5,500–representing a strong increase on the initial specified target of 5,200.

"All of the above prompts us to increase our year-end price target acknowledging the possibility that we might need to raise the target price again later this year should this economic and market outlook prove us too conservative in our projections," wrote Stoltzfus.

Even more bullish is the prediction of a team of Goldman Sachs strategists led by David Kostin who suggested that the S&P 500 could be driven to 6,000 this year thanks to big tech rallies in one scenario where megacaps foster growth of 15%.

However, the team also highlighted one prospective scenario that could see the index crash to 4,500.

The End of Risk?

Although markets have become more optimistic off the back of the Federal Reserve’s March meeting, the performance of inflation between now and June will have a major impact on whether investors retain their confidence in Wall Street’s megacap tech stocks.

Another confounding factor may be the continued escalation of geopolitical tensions and a prospective tumultuous presidential election in November, which could be intensified should it become a close-run event.

There’s also the danger that markets have already long factored in the inevitability of rate cuts, meaning that there may be less distance to run when the hotly anticipated cuts finally occur.

“It is important to realise that the market has changed the paradigm from ‘will there be a rate cut?’ to ‘when?’,” explained Maxim Manturov, head of investment research at Freedom Finance Europe.

“In other words, the markets have built into expectations a rate cut soon, and even if it comes later, from a fundamental perspective it won't have much of an impact given the solid Q4 gains for much of the S&P 500 index. And even though expectations for a Fed rate cut have been pushed back to a later date, the threat of a rate hike is off the table for now.”

While we’re likely to see the positive sentiment flow back into Wall Street as expectations for rate cuts continue to grow, the impact they’ll have on the risky stocks that have helped to facilitate such a strong end to 2023 may have already been priced in. This means that optimism should be balanced with caution in navigating the Fed’s new dovish stance.