Rate Cut Hopes Could Awaken the True Bull Market: Experts Weigh In


Last updated: October 14, 2024

bull_sculpture_in_ny_financial_districtSince October 2022, the bull market’s climb has hinged on AI and a handful of top stocks, sparking concerns about its fragility. But change is in the air.

A stronger-than-expected inflation report has invigorated the market, as investors now anticipate a Federal Reserve rate cut in September. This shift has prompted a rotation away from tech giants into other sectors.

The Roundhill Magnificent Seven ETF, tracking the tech titans that led the 2023 rally, dropped over 1.5% in the past five days.

In contrast, real estate and financial sectors, sensitive to interest rates, emerged as recent winners. The small-cap Russell 2000 index surged over 7%, hitting a new high since 2022.

Reflecting a broadening rally, the equal-weight S&P 500 outperformed its market cap-weighted counterpart.

Callie Cox, Ritholtz Wealth Management’s chief market strategist, described the recent market behavior as “refreshing” and indicative of a maturing bull market with diverse stock contributions.

“If this trade continues, if the prospect for a rate cut is still in play for this fall, then we could finally see the bull wake up, and that’s good news for all investors,” Cox said.

Historically, similar rallies were noted in December 2023 and early this year. The key question now is whether this is a genuine broadening or another fleeting optimism about Fed rate cuts.

Bank of America Securities’ Ohsung Kwon expressed heightened confidence compared to previous periods, citing robust business earnings supporting the rotation narrative.

Bank of America’s analysis predicts earnings growth for 493 stocks outside the tech-heavy “Magnificent Seven” for the first time since 2022.

Earnings growth typically drives stock prices, suggesting a supportive backdrop for a broad rally. However, strategists emphasize the need for actual earnings growth across sectors to validate current expectations.

“I want to see earnings growth come from more sectors than just tech,” Cox said, stressing the importance of diverse sector contributions to the S&P 500’s profit outlook.

Markets are betting heavily on a September rate cut, with CME FedWatch tool showing over 90% probability. Yet, Cox remains cautious, noting the market’s reliance on economic data until rate cuts are confirmed.

Charles Schwab’s Kevin Gordon echoed this caution, underscoring the need for clarity on the Fed’s plans, especially for rate-sensitive small caps.

While he praised recent market moves as positive, he warned that significant rotations take time.

Gordon pointed out the gradual nature of such rotations, suggesting the current rally might progress more slowly.

This shift was evident when the S&P 500 dipped last Thursday, despite positive inflation news, as investors moved away from tech stocks.

“We could see a little bit of this churn where some stocks are passing the baton to other stocks,” Cox said.

“Tech stocks are passing the baton to other stocks. Sure, we may not see prices move up as quickly as they have. But this is the kind of movement that strengthens the foundation of a bull. It means that this rally can be stronger and live longer eventually.”

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About The Author

Co-Founder & Chief Editor
Jon Morgan, MBA, LLM, has over ten years of experience growing startups and currently serves as CEO and Editor-in-Chief of Venture Smarter. Educated at UC Davis and Harvard, he offers deeply informed guidance. Beyond work, he enjoys spending time with family, his poodle Sophie, and learning Spanish.
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LJ Viveros has 40 years of experience in founding and scaling businesses, including a significant sale to Logitech. He has led Market Solutions LLC since 1999, focusing on strategic transitions for global brands. A graduate of Saint Mary’s College in Communications, LJ is also a distinguished Matsushita Executive alumnus.
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