Investing.com — The Federal Reserve’s decision to cut interest rates by 50 basis points has sparked a strong move in the markets, but many are wondering what the long-awaited easing means after the short-term reaction.
The Fed’s move on September 19 was widely anticipated, with the central bank also promising another 50 basis points of cuts before the end of the year. This initially caused a rally, sending prices to new record highs, before a sell-the-news reaction pushed markets slightly lower towards the end of the day.
In the short term, this easing measure has generally put markets in a constructive position. The main risk factors remain potentially negative economic figures, but the current economic calendar is light until early October.
Without the threat of significant earnings reports or major economic releases, investors appear to be operating in an environment that is “1) easing the Fed, 2) slowing economic data but ‘OK’, and 3) generally delivering solid earnings numbers,” according to Sevens Report. a recent note.
Cyclical sectors including energy, materials, consumer discretionary and industrials are expected to outperform, while technology may lag in the near term.
However, the longer-term consequences of the Fed’s decision could be more complex. The key question for investors is whether the Fed acted in time to prevent a broader economic slowdown.
According to the Sevens Report, if timely, the rate cuts could lead to falling interest rates, strong earnings growth and positive economic tailwinds. This would likely result in continued upside momentum for stocks, with the potential for the S&P 500 to reach 6,000.
“I say this with confidence because Fed cuts would lead to this macroeconomic outcome: 1) Falling rates, 2) Continued very strong earnings growth, 3) Positive economic tailwinds, 4) The Fed’s prominence and 5) Expectations of accelerating growth in the future,” wrote president of Sevens Report in the note.
On the other hand, if the Fed’s actions were too late to prevent an economic downturn, the market could face significant risks.
In such a scenario, the S&P 500 could fall to around 3,675 points, which would represent a sharp drop of over 30% from current levels. This downside risk reflects market corrections from previous recessions, such as those in 2000 and 2007.
As markets digest the Fed’s moves, future economic data will become crucial in determining whether the central bank’s policies were effective.
More concretely, investors will need to keep a close eye on upcoming releases to gauge whether the Fed has successfully steered the economy out of recession or whether more challenges lie ahead.
